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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
Commission File No.: 0-22961
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ANNAPOLIS NATIONAL BANCORP, INC.
(Name of small business issuer in its charter)
MARYLAND 52-1648903
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
108 ADMIRAL COCHRANE DRIVE, SUITE 300, ANNAPOLIS, MARYLAND 21401
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (410) 224-4455
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PAR VALUE $0.01 PER SHARE
(Title of class)
THE NASDAQ STOCK MARKET(SM)
(Name of exchange on which registered)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for its fiscal year ended December 31, 1997 were
$1,084,197.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, I.E., persons other than directors and executive officers of the
registrant is $12,820,658 and is based upon the last sales price as quoted on
The Nasdaq Stock Market for March 20, 1998.
The Registrant had 2,312,306 shares of Common Stock outstanding as of March
20, 1998.
Transitional Small Business Disclosure Format. Yes [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER
31, 1997, ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-KSB.
PORTIONS OF THE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF SHAREHOLDERS
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-KSB.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Description of Business.............................................................................3
Item 2. Properties.........................................................................................10
Item 3. Legal Proceedings..................................................................................10
Item 4. Submission of Matters to a Vote of Security Holders................................................10
Item 5. Executive Officers of the registrant...............................................................11
PART II
Item 6. Market for Common Equity and Related Stockholder Matters...........................................11
Item 7. Management's Discussion and Analysis or Plan of Operation..........................................11
Item 8. Financial Statements...............................................................................11
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure...............12
PART III
Item 10. Executive Compensation.............................................................................12
Item 11. Security Ownership of Certain Beneficial Owners and Management.....................................12
Item 12. Certain Relationships and Related Transactions.....................................................12
Item 13. Exhibits and Reports on Form 8-K...................................................................12
SIGNATURES
</TABLE>
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
ANNAPOLIS NATIONAL BANCORP, INC.
Annapolis National Bancorp, Inc. (the "Company"), formerly Maryland Publick
Banks, Inc., was incorporated in May 1988 in Maryland for the purpose of
acquiring and holding all of the outstanding stock of Annapolis National Bank
(the "Bank"). The Company is a registered Bank Holding Company pursuant to the
Bank Holding Company Act (the "BHCA"). The Company was capitalized by an initial
offering of common stock which was sold at $10.00 per share in June 1989 and,
subsequent to January 1990, an offering at $12.50. The Company issued 833,334
shares of common stock at $6.00 per share for a total of $5 million in a public
offering that closed on September 30, 1997 (the "Public Offering"). The offering
expenses and commissions paid to underwriters and brokers in the Public Offering
totaled $491,000. In addition, the Company retired debt and related accrued
interest of $1.1 million. The net proceeds of $3.4 million is being used for
general corporate purposes. The Company's only significant activity is the
operation of the Bank. On a consolidated basis at December 31, 1997, the
Company's total assets were $120.8 million, total liabilities were $109.7
million and stockholders' equity was $11.1 million.
ANNAPOLIS NATIONAL BANK
The Bank is a commercial bank organized under the laws of the United
States. The Bank is a community oriented bank and the only independent
commercial bank headquartered in Annapolis, Maryland. As the Company's only
subsidiary, the Bank currently operates as a full service commercial bank
through its five branches located in Anne Arundel County, Maryland, and one
branch located on Kent Island in Queen Anne's County, Maryland. The Bank's
principal business consists of originating loans and attracting deposits. The
Bank originates commercial loans (including Small Business Administration
("SBA") loans), commercial real estate loans, construction loans, one- to
four-family real estate loans and, to a lesser extent, home equity and consumer
loans. The Bank also invests in U.S. Treasury and U.S. Government agency
securities and other securities issued by or guaranteed by the federal
government. At December 31, 1997, the Bank's loan portfolio totaled $72.2
million. Of this amount, $30.7 million or 42.61% were commercial loans, $20.4
million or 28.34% were commercial real estate loans, $10.0 million or 13.91%
were construction loans, $5.2 million or 7.25% were one- to four-family
residential mortgage loans, $3.4 million or 4.70% were home equity loans and
$2.3 million or 3.19% were consumer and other loans.
BACKGROUND
The Bank was formed as a de novo bank and commenced operations from a
single Annapolis location in January 1990. In June 1990, the Company acquired
most of the assets and liabilities of Gibraltar Savings and Loan, F.A.
("Gibraltar") from the Resolution Trust Corporation as receiver for Gibraltar,
expanding its branch network to five branches. This acquisition was funded, in
part, through a $3.2 million unsecured loan to the Company from a director who
is the principal stockholder of the Company (the "Principal Stockholder") which
bore interest at the Bank's prime rate less 2.0%. The acquisition was accounted
for as a purchase and resulted in a premium paid for the core deposits and other
intangible assets in the amount of $2.2 million to be amortized over a 15 year
period. At December 31, 1990, the fiscal year end following this acquisition,
the Company's assets totaled $43.6 million.
From June 1990 through December 31, 1996, management of the Company
concentrated its efforts on growing the Bank by developing loan and deposit
portfolios primarily in Anne Arundel County, Maryland and the surrounding
counties. The Bank experienced steady growth in assets and deposits while its
earnings consistently trailed its peers due to a high level of operating
expenses and loan losses.
In December 1994, the Company conducted a rights offering through which it
offered its stockholders, at the price of $3.50 per share, the right to purchase
2.5 shares of its Common Stock for each share of common stock owned. The primary
purpose of this offering was to convert the $3.2 million of debt accumulated in
the Gibraltar acquisition into capital to reduce the Company's interest expense
and increase its capitalization. A total of 937,672 shares were sold, of which
907,143 were sold to the Principal Stockholder in exchange for retirement of the
principal portion of the debt. A new note, which had a maturity date of December
31, 1997, was issued to the Principal Stockholder in the amount of $848,400 to
cover the portion of the loan that remained outstanding, and accrued interest at
the Wall Street Journal ("WSJ") prime rate plus 1.0%.The Company repayed the
debt owed to Mr. Lerner in full using a portion of the proceeds from its initial
public offering which closed on September 30, 1997.
3
<PAGE>
REVISED BUSINESS STRATEGY
During the fourth quarter of 1996, the Board of Directors determined that
there was a need to implement a revised business strategy improve the Company's
financial performance. Several members of senior management were relieved of
their responsibilities late in 1996 and early in 1997 and certain other members
of senior management resigned during this same period. In February 1997, the
Board of Directors engaged John W. Marhefka, Jr. as President and Chief
Executive Officer of the Bank and as Vice President and Chief Executive Officer
of the Company. The Board of Directors believes that Mr. Marhefka's management
skills and local market experience will enable him to guide the Company and the
Bank through a reorganization process which will improve operating results
through implementation of a revised business plan. As President and Chief
Executive Officer of Annapolis Bancshares, Inc. and Bank of Annapolis, he
successfully guided those companies from their inception in 1988 through more
than eight years of steady growth and strong continually increasing earnings
performance before they merged with Sandy Springs Bancorp, Inc. In March 1997,
Mr. Marhefka hired Russell J. Grimes, who was appointed as Senior Vice
President, Chief Financial Officer and Treasurer of the Bank and Chief Financial
Officer and Treasurer of the Company. Mr. Grimes was formerly Vice President,
Chief Financial Officer and Treasurer of Annapolis Bancshares, Inc. and Bank of
Annapolis and was instrumental in implementing several successful financial
strategies with those firms. In April 1997, the Board appointed Stanley H.
Katsef as a Director and Vice Chairman of the Board. In addition to his role as
a Director, Mr. Katsef is an employee who assists the Board and Mr. Marhefka
with business development, public relations, and management strategy issues. Mr.
Katsef was formerly Chairman of the Board of Annapolis Bancshares, Inc. and Bank
of Annapolis. Additionally, the Board of Directors adopted a requirement that,
in order to assure a high level of commitment to the Company and the Bank, all
Directors must own at least $100,000 of the Company's common stock. Following
the imposition of this requirement, the composition of the Board of Directors
changed during April 1997. In addition to Messrs. Marhefka and Katsef, two
additional Directors were added who also have long-standing ties to Anne Arundel
County.
The reconstituted Board of Directors and senior management team are in the
process of implementing a revised business strategy designed to enhance
stockholder value. This strategy includes the following components:
CONSOLIDATING THE BANK'S BRANCH NETWORK TO INCLUDE FEWER BRANCH LOCATIONS
AND TO REDUCE OPERATING EXPENSES. The Bank currently operates seven facilities,
six branch offices and a separate 9,500 square foot administrative and
operations headquarters facility. As a result, the Bank's historical operating
expenses have been considerably higher than its peers that, at a comparable
asset size, operate from fewer locations. New management has undertaken a
strategy of reducing the number of locations from which the Bank operates.
Toward that end, the Bank entered into a lease at 900 Bestgate Road in Annapolis
to consolidate its two existing Annapolis branch office locations. Since the new
site is located between the Bank's existing Annapolis branches, management
anticipates that it will retain most of its current customers following the
consolidation. In addition, management believes that the new location is
superior in amenities to both of the Bank's current Annapolis locations and will
allow the Bank to better serve both current and new Annapolis customers. The new
Annapolis location is a "turn-key" existing banking location which required
minimal expense to be ready for occupancy. By reducing the number of branch
offices from six to five, management expects to reduce operating expenses
following the consolidation, which occured in October 1997. Management is
evaluating other branch network consolidation options. Also being evaluated is
the feasibility of relocating the Bank administrative and operations
headquarters to a lower cost and more highly visible location which may be
combined with a branch location to further reduce the total number of facilities
which the Bank operates.
REDUCING NON-PERFORMING ASSETS BY IMPLEMENTING MORE STRINGENT UNDERWRITING
CRITERIA AND MORE AGGRESSIVE COLLECTION PROCEDURES, AND BY INCREASING SECURED
REAL ESTATE LENDING. The Bank has historically had a high level of
non-performing assets and loan losses in relation to its peers. New management
has made a priority of emphasizing the resolution of problem assets by
aggressively pursuing the Bank's default remedies. In doing so, management
expects to reduce the amount of the Bank's existing non-performing assets.
During the first quarter of 1997, management conducted an evaluation of the loan
portfolio and provided for specific loan loss reserves for those assets for
which losses are expected. Additionally, new lending standards are being
implemented in an effort to improve asset quality. Such standards include an
increased emphasis on readily marketable collateral for new loans and a
de-emphasis on certain SBA loan programs.
REDUCING INTEREST EXPENSE BY RETIRING $1.1 MILLION OF COMPANY DEBT WITH A
PORTION OF THE PUBLIC OFFERING PROCEEDS. At December 31, 1997, the Company had
payed in full an unsecured loan from the Principal Stockholder with a principal
balance of $848,400, excluding accrued interest payable which accrued interest
at a rate of 1.0% above the WSJ prime rate. Accrued interest on this debt
totaled $59,574 in 1997, and $78,759 in 1996. The Company retired this debt and
accrued interest on September 30, 1997, following the completion of the Public
Offering.
4
<PAGE>
FOSTERING SUPPORT FOR THE BANK BY INCREASING THE LOCAL OWNERSHIP OF THE
COMPANY BY MARKETING THE OFFERING TO A LARGE NUMBER OF BUYERS WITH THE BANK'S
LOCAL COMMUNITY. Management believes that those persons within the Bank's market
area who become stockholders of the Company are likely to become customers,
supporters and business referral sources of the Bank. Consequently, the Company
intends to market the Offering primarily within the Bank's market area to build
a backbone of community support. Also, the Company has strategically established
a low minimum subscription amount to encourage many small investors to become
owners of the Company and have a vested interest in the Bank.
RESTRUCTURING INTERNAL BANK OPERATIONS TO ATTAIN OPERATING EFFICIENCIES AND
COST REDUCTIONS. Certain of the Bank's systems of processing data and items are
inefficient and expensive. Management is evaluating alternative systems which
are expected to significantly reduce operating expenses. Additionally,
management is re-evaluating expenses bank-wide with a goal of making cost
conscious decisions about whether to continue purchasing certain goods and
services and, if they are to continue being purchased, soliciting competing bids
for such goods and services so as to assure optimum value for dollars spent.
Also, management has recently made an evaluation of its staffing, eliminating
several employment positions and reassigning those duties to other existing
personnel.
INCREASING NET INTEREST INCOME BY EXPANDING THE LOAN AND DEPOSIT
PORTFOLIOS; THE ADDITIONAL CAPITAL PROVIDED BY THE PUBLIC OFFERING WILL SUPPORT
SUCH GROWTH ENABLING THE BANK TO CONTINUE TO COMPLY WITH REGULATORY CAPITAL
REQUIREMENTS. The Bank intends to pursue growth in its loan and deposit
portfolios which it expects will add to net interest income. Growth in the loan
portfolio is intended to be accomplished by utilizing the substantial contacts
of new officers and directors of the Bank, adding additional loan personnel,
aggressively promoting competitively priced products, developing new customer
relationships based upon the Bank's position as the only independent commercial
bank headquartered in Annapolis, and by placing a greater emphasis on real
estate loans whose principal is expected to repay less quickly than commercial
loans. Growth in the deposit portfolio is intended to be accomplished by
aggressively promoting competitively priced products. The increased capital
realized from the Public Offering will allow the Bank to grow while continuing
to comply with regulatory capital requirements. Additionally, such new capital
will provide a low cost source of funds to enhance the Bank's net interest
income.
INCREASING NON-INTEREST INCOME THROUGH EXPANDING ONE- TO FOUR-FAMILY
RESIDENTIAL MORTGAGE SALES AND OTHER FEE INCOME OPPORTUNITIES. Management
expects to increase non-interest income in several areas. The Bank will add
additional home loan originators, expand its array of home loan products, and
seek to build relationships with builders which are intended to increase
opportunities to originate one- to four-family residential mortgage loans for
sale. In doing so, management expects that gains on sales of loans into the
secondary home loan market will increase. The Bank also expects to increase fee
income from operation of its automated teller machine ("ATM") network and from
other sources of fee income.
LENDING ACTIVITIES
The types of loans that the Bank may originate are subject to federal laws
and regulations. Interest rates charged by the Bank on loans are affected by the
demand for such loans and the supply of money available for lending purposes and
the rates offered by competitors. These factors are, in turn, affected by, among
other things, economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, and legislative tax policies.
ANALYSIS OF LOANS
The following table presents the composition of the loan portfolio over the
previous five years.
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans..... $30,749 42.61% $30,469 43.80% $27,727 48.94% $27,025 47.14% $19,724 48.33%
Real estate:
Commercial......... 20,448 28.34 17,845 25.65% 13,553 23.92 5,601 9.77 12,806 31.38
Construction....... 10,035 13.91 10,173 14.62 7,937 14.01 8,672 15.12 345 0.85
One-to four-
family.......... 5,232 7.25 7,002 10.07 4,391 7.75 12,798 22.32 5,637 13.82
Home equity........ 3,393 4.70 1,744 2.51 1,197 2.11 1,016 1.77 615 1.51
Consumer loans....... 2,306 3.19 2,332 3.35% 1,848 3.27 2,226 3.88 1,676 4.11
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total loans..... 72,162 100.00% 69,565 100.00% 56,653 100.00% 57,338 100.00% 40,803 100.00%
Less:
Allowance for loan
losses.......... (1,177) (765) (617) (687) (574)
------- ------- ------- ------- -------
Net loans
receivable......... $70,985 $68,800 $56,036 $56,651 $40,229
</TABLE>
5
<PAGE>
The Bank's loan portfolio consists of commercial, commercial real estate,
residential construction, one- to four-family residential mortgage, home equity
and consumer loans. At December 31, 1997, the Bank's loan portfolio totaled
$72.2 million, of which $30.7 million, or 42.61%, were commercial loans; $20.4
million, or 28.34%, were commercial real estate loans; $10.0 million, or 13.91%,
were construction loans; $5.2 million, or 7.25%, were one- to four-family
residential mortgage loans; $3.4 million, or 4.70% were home equity loans and
$2.3 million, or 3.19%, were consumer and other loans. All of the loans in the
Bank's portfolio are either adjustable-rate or short term fixed-rate loans with
terms to maturity of 30 days to 30 years.
LOAN MATURITY. The following table shows the remaining contractual maturity
of the Bank's loans at December 31, 1997. The table does not include the effect
of future principal prepayments
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------------------------
DUE AFTER ONE
DUE IN ONE YEAR BUT BEFORE DUE AFTER NON ACCRUAL
YEAR OR LESS FIVE YEARS FIVE YEARS LOANS
------------ --------------- ---------- -----------
<S> <C> <C> <C> <C>
Commercial loans............................................. $ 26,902 $ 2,784 $ 285 $ 778
Real Estate
Commercial................................................. 11,295 9,097 56 --
Construction............................................... 9,246 789 -- --
One-to four-family......................................... 2,817 858 1,557 --
Home equity loans.......................................... 3,393 -- -- --
Consumer loans............................................... 1,216 1,090 -- --
------------ --------------- ---------- -----------
Total Loans............................................. $ 54,869 $14,618 $1,898 $ 778
------------ --------------- ---------- -----------
------------ --------------- ---------- -----------
<CAPTION>
TOTAL
-------
<S> <C>
Commercial loans............................................. $30,749
Real Estate
Commercial................................................. 20,448
Construction............................................... 10,035
One-to four-family......................................... 5,232
Home equity loans.......................................... 3,393
Consumer loans............................................... 2,306
-------
Total Loans............................................. $72,162
-------
-------
</TABLE>
The following table sets forth at December 31, 1997, the dollar amount of
gross loans receivable contractually due after December 31, 1998, and whether
such loans have fixed interest rates or variable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1997
--------------------------------------
FIXED RATE VARIABLE RATE TOTAL
---------- ------------- -------
<S> <C> <C> <C>
Commercial loans........................................................................ $1,475 $ 1,594 $ 3,069
Real Estate
Commercial............................................................................ 489 8,664 9,153
Construction.......................................................................... 789 -- 789
One-to four-family.................................................................... 1,274 1,141 2,415
Home equity loans..................................................................... -- -- --
Consumer loans.......................................................................... 490 600 1,090
---------- ------------- -------
Total Loans........................................................................ $4,517 $11,999 $16,516
---------- ------------- -------
---------- ------------- -------
</TABLE>
The Bank does not engage in longer term fixed-rate portfolio lending. Any
long term fixed-rate loans made by the Bank are sold in the secondary market.
COMMERCIAL LENDING. The Bank offers commercial business loans to businesses
operating in the Bank's primary market area. These loans consist of lines of
credit which require an annual repayment, adjustable-rate loans with terms of
five to seven years, and short term fixed-rate loans with terms of up to three
years. Such loans are offered in amounts up to $750,000 and are generally
secured by receivable, inventories, equipment and other assets of the business.
The Bank generally requires personal guarantees on its commercial loans. The
Bank also offers unsecured commercial loans to businesses on a selective basis.
These types of loans are made to existing customers and are of a short duration,
generally one year or less, up to $500,000. The Bank also originates commercial
loans which are guaranteed by the Small Business Administration. The Bank has
been an active participant in a variety of SBA loan programs.
Commercial business loans are generally of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. In order to reduce the overall risk and
cost of its loan portfolio, the Bank intends to reduce the ratio of commercial
loans to total loans and may reduce the level of its SBA loans.
6
<PAGE>
COMMERCIAL REAL ESTATE LENDING. The Bank originates adjustable-rate
commercial real estate loans that are generally secured by properties used for
business purposes such as small office buildings or a combination of residential
and retail facilities located in the Bank's primary market area. The Bank's
underwriting procedures provide that commercial real estate loans may generally
be made in amounts up to 80% of the lower of the appraised value or sales price
of the property, subject to the Bank's current loans-to-one-borrower limit,
which at December 31, 1997, was $1.7 million. These loans may be made with terms
up to 25 years and are generally offered at interest rates which adjust annually
or annually after an initial three year period in accordance with the prime rate
as reported in the Wall Street Journal. In reaching a decision as to whether or
not to make a commercial real estate loan, the Bank considers the value of the
real estate to be financed and the credit strength of the borrower and/or the
lessee of the real estate project. The Bank has generally required that the
properties securing commercial real estate loans have debt service coverage
ratios of at least 1.2 times.
Loans secured by commercial real estate properties generally involve larger
principal amounts and a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of such loans may be subject to adverse conditions
in the real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified on
the basis of the property's value, debt service ratio and, under certain
circumstances, additional collateral.
CONSTRUCTION LENDING. The Bank originates construction loans on both one-to
four-family residences and on commercial real estate properties. The Bank
originates two types of residential construction loans, consumer and builder.
The Bank originates consumer construction loans to build a primary residence, a
secondary residence, or an investment or rental property. The Bank will
originate builder construction loans to companies engaged in the business of
constructing homes for resale. These loans may be for homes currently under
contract for sale, model homes from which other homes will be marketed within a
subdivision or, on a very limited basis, homes built for speculative purposes to
be marketed for sale during construction. Although the Bank attempts to procure
permanent end financing, many of the Bank's construction loans, at the time
entered into with the Bank, have permanent end financing committed by other
financial institutions.
The Bank originates land acquisition and development loans with the source
of repayment being either the sale of finished lots or the sale of homes to be
constructed on the finished lots. The Bank will originate land acquisition,
development, and construction loans on a revolving line of credit basis for
subdivisions whereby the borrower may draw upon such line of credit as lots are
sold for the purpose of improving additional lots. Construction loans are
generally offered with terms up to six months for consumer loans, up to twelve
months for builder loans, and up to eighteen months for land development loans.
Construction loans are generally made in amounts up to 80% of the value of
the security property. During construction, loan proceeds are disbursed in draws
as construction progresses based upon inspections of work in place by
independent construction inspectors.
At December 31, 1997, the Bank had construction loans, including land
acquisition and development loans totaling $10.0 million, or 13.91% of the
Bank's total loan portfolio, of which $7.2 million consisted of one- to
four-family residential construction loans, $851,000 consisted of commercial
real estate construction loans and $2.0 million consisted of land acquisition
and development loans.
Construction loans are generally considered to involve a higher degree of
credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the security property's value upon completion of
construction as compared to the estimated costs of construction, including
interest. Also, the Bank assumes certain risks associated with the borrowers'
ability to complete construction timely and in a workmanlike manner. If the
estimate of value proves to be inaccurate, or if construction is not performed
timely or accurately, the Bank may be confronted with a project which, when
completed, has a value which is insufficient to assure full repayment.
One- to Four-Family Residential Mortgage Lending. The Bank currently offers
both fixed-rate and adjustable-rate mortgage loans, first and second mortgage
loans secured by one- to four-family residences and lots for one- to four-family
residences located throughout Central Maryland. It is currently the general
policy of the Bank to originate for sale in the secondary market one-to
four-family fixed-rate residential mortgage loans which conform, except as to
size, to the underwriting standards of Fannie Mae, and Freddie Mac, and to
originate for investment adjustable rate one- to four-family residential
mortgage loans. The Bank generally does not retain the servicing rights of loans
it sells and sells such loans without recourse, with the exception of a recourse
in the event of breaches for any representations or warranties made by the Bank.
The Bank
7
<PAGE>
recognizes, at the time of sale, the cash gain or loss on the sale of the loans
based on the difference between the net cash proceeds received and the carrying
value of the loans sold. One- to four-family mortgage loan originations are
generally obtained from the Bank's loan representatives and their contacts with
the local real estate industry, direct contacts made by the Bank's and the
Company's directors, existing or past customers, and members of the local
communities.
At December 31, 1997, one- to four-family residential mortgage loans
totaled $5.2 million, or 7.25%, of total loans. Of the one- to four-family
mortgage loans outstanding at that date, $1.6 million were fixed-rate loans with
terms of up to three years with a balloon payment at the end of the term and
$3.6 million were adjustable-rate mortgage loans. The Bank currently offers a
number of adjustable-rate mortgage loans with terms of up to 30 years and
interest rates which adjust annually from the outset of the loan or which adjust
annually after a 1 or 3 year initial period in which the loan has a fixed rate.
The interest rates for the majority of the Bank's adjustable-rate mortgage loans
are indexed to the one year Treasury Constant Maturity Index. Interest rate
adjustments on such loans are limited to a 2% annual adjustment cap with a
maximum adjustment of 6% over the life of the loan.
The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps to reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Although the Bank offers adjustable-rate loans at below
market interest rates, all loans are underwritten to assure that the borrower is
qualified on a fully-indexed basis.
Periodic and lifetime caps on interest rate increases help to reduce the
risks associated with the Bank's adjustable-rate loans, but also limit the
interest rate sensitivity of its adjustable-rate mortgage loans.
The Bank currently originates one- to four-family residential mortgage
loans in amounts up to 80% of the lower of the appraised value or the selling
price of the property securing the loan. Mortgage loans originated by the Bank
generally include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Bank's consent.
Due-on-sale clauses are an important means of adjusting the yields on the Bank's
fixed-rate mortgage loan portfolio and the Bank has generally exercised its
rights under these clauses.
HOME EQUITY LENDING. As of December 31, 1997, home equity loans totaled
$3.4 million, or 4.70% of the Bank's total loan portfolio. Fixed-rate,
fixed-term home equity loans and adjustable rate home equity lines of credit are
offered in amounts up to 100% of the appraised value with a maximum loan amount
of $100,000. Fixed-rate, fixed-term home equity loans are offered with terms up
to five years and home equity lines of credit are offered with terms up to
twenty years. Substantially all of the Bank's home equity loans are adjustable
rate and reprice with changes in the WSJ prime rate.
CONSUMER LENDING. The Bank's portfolio of consumer loans primarily consists
of adjustable rate, personal lines of credit and installment loans secured by
new or used automobiles, new or used boats, and loans secured by deposit
accounts. Unsecured consumer loans are made with a maximum term of three years
and a maximum loan amount based on a borrower's financial condition. At December
31, 1997, consumer loans totaled $2.3 million or 3.19% to total loans
outstanding. Consumer loans are generally originated in the Bank's primary
market area.
CREDIT RISK MANAGEMENT
The Bank's allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in its loan
portfolio and the general economy. The allowance for loan losses is maintained
at an amount management considers adequate to cover estimated losses in loans
receivable which are deemed probable and estimable based on information
currently known to management. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to make additional provisions for estimated
loan losses based upon judgments different from those of management. As of
December 31, 1997, the Bank's allowance for loan losses was $1.2 million or 1.6%
of total loans and 102.44% of non-performing loans as compared to $765,000, or
1.1% of total loans and 38.35% of non-performing loans as of December 31, 1996.
The Bank had total non-performing loans of $1.1 million and $2.0 million at
December 31, 1997 and December 31, 1996, respectively, and non-performing loans
to total loans of 1.59% and 2.87%, at December 31, 1997, and December 31, 1996,
respectively.
The Bank continues to monitor and modify its allowances for loan losses as
conditions dictate. While management believes that, based on information
currently available, the Bank's allowance for loan losses is sufficient to cover
losses
8
<PAGE>
inherent in its loan portfolio at this time, no assurances can be given that the
Bank's level of allowance for loan losses will be sufficient to cover future
loan losses incurred by the Bank or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions at the time management
determined the current level of the allowance for loan losses. Management may in
the future increase its level of loan loss allowances as a percentage of total
loans and non-performing loans as its loan portfolio increases.
ANALYSIS OF CREDIT RISK
Activity in the allowance for loan losses for the preceding two years ended
December 31 is shown below:
AT DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Total loans outstanding................................................................................. $72,162 $69,565
Average loans outstanding............................................................................... 72,385 62,144
Allowance for loan losses at beginning of period........................................................ 765 617
Provision charged to expense............................................................................ 748 452
------- -------
Chargeoffs:
Residential/commercial real estate.................................................................... 0 15
Commercial loans...................................................................................... 362 279
Consumer and other loans.............................................................................. 6 28
------- -------
Total.............................................................................................. 368 322
------- -------
Recoveries:
Residential/commercial real estate.................................................................... 9 8
Commercial loans...................................................................................... 21 10
Consumer and other loans.............................................................................. 2 --
------- -------
Total.............................................................................................. 32 18
------- -------
Net chargeoffs.......................................................................................... 336 304
------- -------
Allowance for loan losses at end of period.............................................................. $ 1,177 $ 765
------- -------
------- -------
Allowance for loan losses as a percent of total loans................................................... 1.63% 1.10%
Net chargeoffs as a percent of average loans............................................................ .46% .49%
------- -------
------- -------
</TABLE>
PERSONNEL
As of December 31, 1997 the Bank had 50 authorized full-time positions and
13 authorized part-time employee positions.
FEDERAL TAXATION
The Company and the Bank file consolidated federal income tax returns and
separate Maryland income tax returns. The Company and the Bank use the accrual
method of accounting, and are subject to federal income taxation in the same
manner as other corporations with some exceptions, notably the Bank's reserve
for bad debts. This discussion of tax matters is intended only as a summary and
is not intended to be a comprehensive description of the tax rules applicable to
the Bank or the Company. The Bank has not been audited by the Internal Revenue
Service or State of Maryland in the last 5 years. For its 1997 taxable year, the
Bank is subject to a maximum federal income tax rate of 34%.
STATE AND LOCAL TAXATION
STATE OF MARYLAND. The Company files a Maryland income tax return.
"Maryland Taxable Income" generally means federal taxable income, subject to
certain adjustments (including the addition of interest income on state and
municipal obligations and the exclusion of interest income on United States
Treasury obligations). The exclusion of income on United States Treasury and
certain United States agency obligations has the effect of reducing Maryland
taxable income. For 1997, neither the Company nor the Bank accrued or payed
Maryland income tax due to these exclusions. The Bank is required to file an
annual report with and pay an annual franchise tax to the State of Maryland.
Taxable income reported on a franchise
9
<PAGE>
tax return is similar to taxable income on a Maryland income tax return, except
that U.S. government and agency obligations are only 75% excluded.
IMPACT OF NEW ACCOUNTING STANDARDS
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings per Share which changes the earnings per share
disclosed from primary and fully diluted per share amounts to basic and diluted
per share. Under SFAS No. 128, basic earnings per share are determined by
dividing net income by the weighted average number of shares of common stock
outstanding. Diluted earnings per share is calculated including the average
dilutive common stock equivalents outstanding during the period. Earnings per
share disclosures for prior periods have been restated to conform to these new
calculation methods. Dilutive common equivalent shares consist of stock options,
calculated using the treasury stock method. In loss periods, dilutive common
equivalent shares are excluded since the shares would be antidilutive.
Information relating to the regulation and supervision of the registrant
appears in the registrant's 1997 Annual Report to Stockholders on page 21, and
is incorporated herein by reference.
ITEM 2. PROPERTIES
The executive offices of the Company and the Bank are located at 180
Admiral Cochrane Drive, Suite 300, Annapolis, Maryland 21401.
The following table sets forth the location of and certain additional
information regarding the offices of the Company and the Bank at December 31,
1997.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED YEAR OF LEASEHOLD
LEASED/ OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1997
- ---------------- ------------ -------- ---------- -----------------
<S> <C> <C> <C> <C>
Administration Leased 1995 2005 $49,408
Bestagate Leased 1997 1999 22,275
Edgewater Land Leased 1996 2006(1) 418,262
Cape St. Claire Leased 1995 2000(1) 72,121
Kent Island Leased 1990 1998(1) -0-
Severna Park Leased 1996 2006(1) 18,718
</TABLE>
- ---------------
(1) These leases may be extended at the option of the Company for periods
ranging from three to twenty years.
The Bank consolidated its West Street and Taylor Avenue branches located in
Annapolis to one new location at 900 Bestgate Road in Annapolis on October 14,
1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE>
ITEM 5. EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to directors and named executive officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 23, 1998 at
pages 4 through 6. In addition, information concerning Executive Officers who
are not directors is set forth below:
<TABLE>
<CAPTION>
AGE AT
NAME 12/31/97 POSITION WITH THE COMPANY AND BANK AND PAST FIVE YEARS EXPERIENCE
- ----------------------- -------- ---------------------------------------------------------------------
<S> <C> <C>
Jeffrey S. Armiger 41 Senior Vice President, Business Banking of the Bank. Mr. Armiger has
been an officer of the Bank since 1990 and is primarily responsible
for the Bank's Commercial loan activities including business
development and relationship management. Mr. Armiger has held similar
positions with First American Bank.
Kevin J. Barron 42 Senior Vice President, Real Estate Lending, of the Bank. Mr. Barron
has been an officer of the Bank since December 1997, and is primarily
responsible for the Bank's Commercial and Residential real estate
lending activities and the Bank's Mortgage banking division. His
prior thirteen years of related experience included ten years with
Signet Bank, culminating as Senior Vice President in charge of real
estate lending for the Baltimore and Washington regions. Prior to
joining Signet, Mr. Barron served as a real estate lender at a Mellon
Bank subsidiary for three years.
Russell J. Grimes, Jr. 41 Chief Financial Officer and Treasurer of the Company and Senior Vice
President, Chief Financial Officer and Treasurer of the Bank. Prior
to joining the Company in 1997, Mr. Grimes was Vice President,
Treasurer and Chief Financial Officer of Annapolis Bancshares, Inc.
and Bank of Annapolis from 1994 to 1996. Mr. Grimes held similar
positions with First Virginia Banks, Inc. and American National
Savings Bank, F.S.B. prior to 1994.
Michael L. Irwin 38 Senior Vice President, Credit Administration of the Bank. Mr. Irwin
has been an officer of the Bank since February 1997 and is primarily
responsible for the administration of credit standards for the Bank.
Mr. Irwin held similar positions with Taneytown Bank and Trust.
Lori J. Mueller 34 Secretary of the Company and Senior Vice President, Administration
and Marketing of the Bank. Ms. Mueller has been an officer of the
Bank since 1990 and is responsible for retail banking, deposit
account administration, marketing, employee benefits and general bank
administration.
</TABLE>
PART II
ITEM 6. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information relating to the market for Registrant's common equity and
related stockholder matters appears in the Registrant's 1997 Annual Report to
Stockholders on page 22, and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The above-captioned information appears under Management's Discussion and
Analysis of Results of Operations and Financial Condition in the Registrant's
1997 Annual Report to Stockholders on pages 6 through 22 and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS
The Consolidated Financial Statements of Annapolis National Bancorp, Inc.
and its subsidiary, together with the report thereon by Rowles & Company, LLP
for the year ended December 31 1997 appears in the Registrant's 1997 Annual
Report to Stockholders on pages 23 through 42 and are incorporated herein by
reference.
11
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. EXECUTIVE COMPENSATION
The information relating to directors' and executive compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held on April 23, 1998 on pages 7 through
10.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 23, 1998 on
pages 2 and 3.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held on April 23, 1998 at page 10.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements
Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1997 Annual Report to
Stockholders
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Independent Auditors' Report............................................................................... 23
Consolidated Balance Sheet as of December 31, 1997......................................................... 24
Consolidated Statements of Income for the years ended December 31, 1997 and 1996........................... 25
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997 and 1996.. 26
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996....................... 27-28
Notes to Consolidated Financial Statements................................................................. 29-42
</TABLE>
The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
(2) Exhibits
The following exhibits are filed as part of this report.
<TABLE>
<S> <C>
3.1 Articles of Incorporation of Annapolis National Bancorp, Inc.*
3.2 Bylaws of Annapolis National Bancorp, Inc.*
4.0 Stock Certificate of Annapolis National Bancorp, Inc.*
10.1 Employment Agreement between Annapolis National Bancorp, Inc. and John W. Marhefka, Jr.*
10.2 Promissory Note between Annapolis National Bancorp, Inc. and Lawrence E. Lerner dated January 31, 1995*
10.3 Annapolis National Bancorp, Inc. Employee Stock Option Plan*
10.4 Form of Escrow Agreement between Annapolis National Bancorp, Inc. and FMB Trust Company, National
Association*
11.0 Computation of earnings per share (filed herewith)
13.0 1997 Annual Report to Stockholders (filed herewith)
21.0 Subsidiary information is incorporated herein by reference to "Part I -- Subsidiaries"
27.0 Financial Data Schedule (filed herewith)
99.0 1997 Proxy Statement (filed herewith)
</TABLE>
-----------------------
* Incorporated herein by reference to the Exhibits to Form SB-2,
Registration Statement, filed on June 23, 1997 and any amendments
thereto, Registration No. 333-29841.
(b) Reports on Form 8-K:
None.
12
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
ANNAPOLIS NATIONAL BANCORP, INC.
By: /s/ JOHN W. MARHEFKA, JR.
__________________________________
JOHN W. MARHEFKA, JR.
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates stated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ JOHN W. MARHEFKA, JR. President, Chief Executive Officer and Director March 30, 1998
____________________________________ (principal executive officer)
JOHN W. MARHEFKA, JR.
/s/ RUSSELL J. GRIMES, JR. Treasurer and Chief Financial Officer March 30, 1998
____________________________________ (principal accounting and financial officer)
RUSSELL J. GRIMES, JR.
/s/ ALBERT PHILLIPS Director-President March 30, 1998
____________________________________
ALBERT PHILLIPS
/s/ STANLEY H. KATSEF Director March 30, 1998
____________________________________
STANLEY H. KATSEF
/s/ RONALD E. GARDNER Director March 30, 1998
____________________________________
RONALD E. GARDNER
/s/ STANLEY J. KLOS, JR. Director March 30, 1998
____________________________________
STANLEY J. KLOS, JR.
/s/ LAWRENCE E. LERNER Director March 30, 1998
____________________________________
LAWRENCE E. LERNER
/s/ RICHARD M. LERNER Director March 30, 1998
____________________________________
RICHARD M. LERNER
/s/ DIMITRI P. MALLIOS Director March 30, 1998
____________________________________
DIMITRI P. MALLIOS
</TABLE>
13
Exhibit 11
Calculation of Earnings per Share
<PAGE>
December 31
1997 1996 1995
-----------------------------------------
Average Shares Outstanding 1,691,301 1,478,972 1,401,903
Net income $1,084,197 $ 422,540 $ 791,703
Basic Earnings per Share $ 0.64 $ 0.29 $ 0.57
Diluted Earnings per Share $ 0.63 $ 0.29 $ 0.57
[ANNAPOLIS NATIONAL BANCORP, INC. LOGO]
Annual Report 1997
<PAGE>
OUR MISSION IS TO BE THE BANK OF CHOICE IN THE MARKETS WE SERVE. WE WILL
ACCOMPLISH THIS BY FOCUSING ON OUR CORE VALUES AND COMMITMENTS OF:
o BEING OUR COMMUNITY'S LOCALLY OWNED & MANAGED, INDEPENDENT ALTERNATIVE
TO LARGE, IMPERSONAL, OUT-OF-TOWN BANKS
o EXCEEDING OUR CUSTOMERS' EXPECTATIONS BY PROVIDING THE HIGHEST LEVELS
OF FAST, RESPONSIVE CUSTOMER SERVICE, LISTENING, AND OFFERING THEM
ACCESS TO LOCAL DECISION MAKERS
o TREATING OUR CUSTOMERS AND EMPLOYEES FAIRLY AND WITH RESPECT, KNOWING
THEM, AND CARING ABOUT THEIR WELL-BEING
o DELIVERING FIRST RATE, COMPETITIVELY PRICED, EASY TO USE PRODUCTS AND
SERVICES THAT OUR CUSTOMERS WANT
o AGGRESSIVE BUT SAFE GROWTH OF OUR MARKET SHARE OF LOANS AND DEPOSITS
o BEING A GOOD CORPORATE CITIZEN BY PARTICIPATING IN LOCAL COMMUNITY
ORGANIZATIONS AND PROGRAMS
o BUILDING SHAREHOLDER VALUE BY OPERATING PROFITABLY AND INCREASING
MARKET PRICE & LIQUIDITY FOR OUR STOCKHOLDERS
OUR EVERY ACTION WILL CONVEY PRIDE IN WHO WE ARE AND WHERE WE ARE GOING.
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
A YEAR OF INVESTING IN OUR FUTURE
The year 1997 will be remembered as a time of great change during which we
re-engineered nearly every area of Annapolis National Bancorp, Inc. (the
"Company") and Annapolis National Bank (the "Bank") to position them for a much
brighter future. The year of change was highlighted by the implementation of a
revised business strategy designed to improve the financial performance and
enhance shareholder value. The revised business strategy has impacted virtually
all aspects of the Company and the Bank, including management, capitalization,
shareholder value, growth, profitability, asset quality, new initiatives, and
our commitment to the future.
MANAGEMENT
The management team of Annapolis National has been reconstructed at every
level with a mixture of new talent and company veterans. In February 1997, the
Board of Directors engaged John W. Marhefka, Jr. as Chief Executive Officer of
the Company and the Bank. In March, 1997, Russell J. Grimes, Jr., was named
Chief Financial Officer of the Company and the Bank. Later in the year, two
long-standing Bank officers were promoted to positions of increased authority as
Lori J. Mueller became Senior Vice President for Administration & Marketing
while Jeffrey S. Armiger was made Senior Vice President of the Bank's Business
Banking Unit. In October, 1997, Michael R. Irwin was appointed as Senior Vice
President of Credit Administration and, in December, Kevin J. Barron was engaged
as Senior Vice President of Real Estate Lending to round out the new senior
management team. This team is comprised of seasoned bankers who will provide
experienced leadership to our staff while implementing the Bank's revised
business strategy.
[PHOTO APPEARS HEARE -- John W. Marhefka, Jr.]
The composition of the Board of Directors also changed following the
adoption of a policy that, in order to assure a high level of commitment to the
Company, all Directors must own at least $100,000 of the Company's common stock.
Following the implementation of this policy in April, 1997, several former
Directors chose not to continue, while four new Directors were added who have
long-standing ties to Anne Arundel County. The new Directors were Stanley H.
Katsef, Vice Chairman of the Board, Ronald E. Gardner, Stanley J. Klos, Jr., and
John W. Marhefka, Jr. Our four new Directors offer a new perspective and a
healthy compliment to a Board which also benefits from the experience of its
five founding members.
In addition to changes in the Board and Senior Management, 1997 also saw
the Bank's middle management officer level restructured with the addition of
relationship managers in all of our branch offices to spearhead a sales culture,
commercial lenders in our business banking unit to build upon our small business
lending expertise, additional real estate lenders to expand our construction
lending niche, mortgage bankers to develop our home lending products and
administrative support for our growing loan servicing, operations, and
accounting/finance functions. This was truly a year that has changed the face
of the Company and the Bank at every level, including our stockholders. . . . .
1
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
SHAREHOLDER VALUE
Our year began with 85 stockholders and ended with more than 700, so most
of our owners are new as well. Even the name of the Company was changed from
"Maryland Publick Banks, Inc." to "Annapolis National Bancorp, Inc." to be more
representative of the single-bank holding company that we are. The Company
conducted a successful initial public stock offering which helped it to achieve
a number of strategic goals during the year. By raising over $5 million, our
Stockholders' Equity more than doubled during the year to $11.1 Million. The
additional capital has positioned us for future growth by increasing both our
legal lending limit and our regulatory capital ratios. We strengthened the bond
with our local community by bringing many new local owners into the family who
are becoming customers, business referral sources, and general supporters of the
Bank. By selling the new shares at $6.00 each, a premium to book value, the
offering was accretive to our book value per share, which increased by $1.09 per
share, or 29.46%, during the year from $3.70 as of December 31, 1996 to $4.79 on
December 31, 1997. Future period Interest Expense was reduced by retiring $1.1
Million of holding company debt upon completion of the offering on September 30,
1997. The offering of 833,334 shares of common stock was oversubscribed in a
brief initial offering period, creating demand to support an aftermarket in the
shares. On October 1, 1997, our common stock debuted on The NASDAQ Stock
MarketSM under the ticker symbol "ANNB". The opening bid for the shares that
first day as a publicly traded company was $7.75. By year end, the bid price had
risen to $10.50 amid brisk trading volume. With several brokerage firms now
acting as market makers by posting daily "bid" and "ask" prices for our shares,
we have made great strides in increasing liquidity for those investors who
choose to sell our shares and in advancing the market price for those investors
who choose to share in our future. 1997 was a banner year for accomplishing our
number one priority, enhancing shareholder value.
GROWTH
Annapolis National experienced growth throughout its balance sheet during
1997. Total Assets grew to $120.8 Million as of December 31, 1997, a 20.6%
increase over December 31, 1996 Total Assets of $100.2 Million. Asset growth was
primarily funded by a 17.0% increase in Total Deposits and Repurchase Agreements
during the year, increasing to $109.4 Million as of December 31, 1997 from $93.5
Million a year earlier. Net Loans Receivable grew by 3.2% during the year to
$71.0 Million as of December 31, 1997. Total Stockholders' Equity more than
doubled to $11.1 Million during the year due to our successful initial public
stock offering and record earnings performance.....
PROFITABILITY
1997 Net Income of $1,084,000, or $0.64 per share, represented a 156.3%
increase over 1996 Net Income of $423,000, or $0.29 per share. It was the finest
earnings year in Annapolis National's eight year history and our first million
dollar year. The improved earnings performance was driven
2
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
by a 17.0% increase in Net Interest Income, which rose to $5.5 Million in 1997
from $4.7 Million in 1996, and was further supplemented by a 29.8% increase in
Noninterest Income, which rose to $762,000 in 1997 from $587,000 in 1996. We are
pleased that Annapolis National was able to achieve record growth and earnings
performance during 1997 while engineering substantial restructuring of the
Company. 1997 earnings were impacted by two large nonrecurring items, $796,000
of restructuring expenses associated with the implementation of the revised
business plan, and $769,000 of Federal income tax benefits from prior years' net
operating loss carryforwards.
ASSET QUALITY
A major aspect of the revised business strategy has been to reduce
nonperforming assets by implementing more stringent underwriting criteria and
more aggressive collection procedures. Total nonperforming assets (loans over
ninety days past due and other real estate owned) totaled $2,135,000, or 2.13%
of Total Assets as of December 31, 1996. By December 31, 1997, nonperforming
assets had been reduced to $1.2 million, or 1.18% of Total Assets. We continue
to make asset quality a top management priority.
OTHER NEW INITIATIVES
New management has taken a fresh look at everything we do and has
undertaken many other new initiatives. In April, 1997, the Company implemented
an incentive stock option plan which has been instrumental in helping us to
recruit, retain, and motivate the best management talent available by
encouraging them to act like owners. Additional incentive compensation plans
were implemented to assist us in accomplishing another strategic goal of
encouraging a strong sales culture throughout the organization. In October,
1997, we completed the consolidation of our two Annapolis offices into one new
Annapolis facility located near the Annapolis Mall on Bestgate Road. The new
Bestgate branch is a state of the art office offering many amenities which the
prior offices did not and allowing us to better serve both new and existing
customers from a superior location while reducing our overhead expenses. We
conducted a customer satisfaction survey during 1997 designed to help us
understand what we are doing well and where we have room to improve. In response
to the survey, we have restructured many of our product lines so that we now
offer the most competitive checking account, consumer loan, and home loan
products available in our market. We continue to re-evaluate every aspect of our
business on an ongoing basis and will continue to evolve and improve throughout
1998 and beyond....
COMMITMENT TO THE FUTURE
As the only independent bank holding company and commercial bank
headquartered in Annapolis, we are very excited about our future and the
opportunity to make a difference in our community. In November, 1997, our
commitment to our community was recognized and rewarded when the Bank earned an
"Outstanding" rating for Community Reinvestment Act performance as a result of
an evaluation by the Comptroller of the Currency. As we move into 1998, we are
proud of
3
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
our recent accomplishments and well positioned for even greater future success.
We have carved a niche in the highly competitive local banking market by
adhering to a philosophy of providing quality financial products and first rate
personal service to our increasing customer base. Consolidation within the
banking industry has created a wealth of opportunity for us to continue to grow
and prosper as a locally owned and managed community bank. We are succeeding in
attracting many new customers who prefer to bank with one of the few remaining
local banks, giving added meaning to our slogan, "Your Hometown Bank".
Our goal is to continue building financial strength through controlled
growth. We have been fortunate to attract many capable, experienced, and
motivated new Directors and employees to compliment a solid nucleus which was in
place. This dedicated and enthusiastic team serves the Company with pride and
efficiency. We have set very high goals for ourselves and for this Company. We
are committed to building Annapolis National into a market force which is a
valuable asset to its stockholders, its customers, and its local community. We
appreciate your confidence and support.
/s/ John W. Marhefka, Jr.
- -------------------------
John W. Marhefka, Jr.
Chief Executive Officer
March 12, 1998
4
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
CORPORATE PROFILE
ANNAPOLIS NATIONAL BANCORP, INC., formerly Maryland Publick Banks, Inc.,
is a bank holding company, incorporated in May 1988 for the purpose of acquiring
and holding all of the outstanding stock of Annapolis National Bank, a federally
insured community oriented bank and the only independent commercial bank
headquartered in Annapolis, Maryland. The Bank currently operates as a full
service commercial bank from its headquarters in Annapolis, and its four
branches located in Anne Arundel County, Maryland, and one branch located on
Kent Island in Queen Anne's County, Maryland. The Bank's principal business
consists of originating loans and attracting deposits. The Bank originates
commercial loans, commercial real estate loans, construction loans, one- to
four-family real estate loans, home equity and consumer loans. The Bank also
invests in U.S. Treasury and U.S. Government agency securities and other
securities issued by or guaranteed by the federal government.
The Bank conducts a general commercial and retail banking business in its
market area, emphasizing the banking needs of small businesses, professional
concerns and individuals. The Bank draws most of its customer deposits from Anne
Arundel County, Maryland, and to a lesser extent, Queen Anne's County, Maryland.
The Bank's lending operations are centered in Anne Arundel County, but extend
throughout Central Maryland.
The Bank competes with numerous other financial intermediaries,
commercial banks, savings and loan associations, credit unions, mortgage banking
firms, consumer finance companies, securities brokerage firms, insurance
companies, money market mutual funds and other financial institutions operating
in Anne Arundel County and elsewhere.
The Bank's Anne Arundel County service area is a highly concentrated,
highly branched banking market. Competition in Anne Arundel County for loans to
small businesses and professionals, the Bank's target market, is intense and
pricing, service and access to decision makers are important. Deposit
competition among institutions in Anne Arundel County also is strong.
The Bank employed 50 full time and 13 part time individuals at December
31, 1997.
The Bank continually evaluates new products, and implements such new
products as deemed appropriate by management.
5
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following is management's discussion and analysis of the historical
financial condition and results of operations of Annapolis National Bancorp,
Inc. on a consolidated basis with its wholly owned subsidiary, Annapolis
National Bank, for the periods presented, and should be read in conjunction with
the consolidated statements and the related notes thereto appearing elsewhere in
this annual report.
The Company reported net income for 1997 of $1,084,197, a 156.59%
increase over 1996 earnings of $422,540. Basic earnings per share increased to
$0.64 per share compared to $0.29 per share in 1996. The primary source of
income of the Bank is interest on its loan and investment portfolios. The
principal expense of the Bank is interest on its deposit accounts and
borrowings. The difference between interest income on interest earning assets
and interest expense on interest bearing liabilities is referred to as net
interest income. Net interest income was $5.5 million for 1997, an increase of
$871,000 or 18.53% compared to $4.7 million in 1996.
Total assets grew to $120.8 million as of December 31, 1997, a 20.56%
increase over the December 31, 1996 total assets of $100.2 million. The
Company's return on average assets was 0.99% and 0.44% at December 31, 1997, and
1996 respectively. The Company's return on average equity was 14.83% and 7.98%
at December 31, 1997, and 1996 respectively.
At December 31, 1997, the Bank's loan portfolio totaled $72.2 million. Of
this amount, $30.7 million or 42.61% were commercial loans, $20.5 million or
28.34% were commercial real estate loans, $10.0 million or 13.91% were
construction loans, $5.2 million or 7.25% were one- to four-family residential
mortgage loans, and $3.4 million or 4.70% were home equity loans, and $2.3
million or 3.19% were consumer and other loans.
6
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
The following table shows selected consolidated financial highlights for the
Company at and for the four years ended December 31, 1994, through December 31,
1997.
SELECTED CONSOLIDATED FINANCIAL DATA
AT AND FOR YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
===========================================================================================================================
SELECTED FINANCIAL DATA 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Total assets $ 120,827 $ 100,227 $ 95,296 $ 75,859
Total loans, net of deferred fees and costs 72,162 69,565 56,653 57,337
Total deposits 96,062 87,106 82,096 66,118
Securities sold under agreement to repurchase 13,306 6,345 6,970 4,741
Note payable -- 1,004 925 4,004
Stockholders' equity 11,087 5,471 5,046 760
SELECTED OPERATING DATA
Interest income $ 9,161 $ 8,021 $ 7,651 $ 5,552
Interest expense 3,630 3,362 3,099 2,260
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 5,531 4,659 4,552 3,292
Provision for credit losses 748 452 318 300
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 4,783 4,207 4,234 2,992
Restructuring expense 796 -- -- --
Other income 762 587 521 394
Operating expense 4,434 4,371 3,957 3,313
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 315 423 798 73
Income tax benefit (expense) 769 -- (6) --
Net income before minority interest in
earnings of consolidated subsidiary 1,084 423 792 73
Minority interest in earnings of
consolidated subsidiary -- -- -- 55
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 1,084 $ 423 $ 792 $ 18
===========================================================================================================================
KEY FINANCIAL RATIOS AND OTHER DATA
Return on average assets 0.99% 0.44% 0.94% 0.03%
Net income divided by average assets
Return on average equity 14.83% 7.98% 19.26% 1.97%
Net income divided by average equity
Equity to asset ratio (1) 6.70% 5.46% 4.88% 1.30%
Average equity divided by average assets
Basic earnings per share $0.64 $0.29 $0.57 $0.03
Book value per share $4.79 $3.70 $3.41 $1.40
Tangible book value per share $4.70 $3.17 $2.78 $(0.58)
Number of shares outstanding 2,312,306 1,478,972 1,478,972 541,300
Efficiency ratio (2) 83.11% 83.34% 78.00% 89.88%
Interest rate spread 4.88% 4.68% 5.29% 4.74%
Net interest margin 5.37% 5.10% 5.73% 4.98%
Risk based capital ratio--Tier 1 15.16% 7.46% 7.68% (0.12%)
Risk based capital ratio--Total 16.42% 8.68% 8.83% 1.13%
===========================================================================================================================
</TABLE>
(1) The Company's initial public stock offering closed on September 30, 1997
with net proceeds of $3.5 million. The average capital used to calculate
this ratio reflects the increase in capital for the last quarter of 1997.
(2) Includes restructuring expense of $796,000 for the year ended December 31,
1997.
7
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
The following table presents a condensed average balance sheet as well as
income/expense and yields/costs of funds thereon for the years ended December
31, 1997, 1996 and 1995. The yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities for the periods shown.
Average balances are derived from average daily balances. The yields and costs
include loan fees which are considered adjustments to yields. Net interest
spread, the difference between the average rate on interest bearing assets and
the average rate on interest bearing liabilities, increased to 4.88% from the
year ended December 31, 1997, compared to 4.68% at December 31, 1996.
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES
<TABLE>
<CAPTION>
==============================================================================================================================
YEARS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
Interest Earning Assets:
Federal Funds Sold and
other overnight
investments $ 14,447 $ 776 5.37% $10,935 $ 565 5.17% $ 9,859 $ 557 5.65%
Investment Securities 16,253 937 5.77 18,339 975 5.32 12,727 714 5.61
Loans 72,385 7,448 10.29 62,144 6,481 10.43 56,905 6,380 11.21
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 103,085 9,161 8.89 91,418 8,021 8.77 79,491 7,651 9.62
==============================================================================================================================
Noninterest Earning Assets
Cash and Due From Banks 3,830 3,210 2,851
Other Asets 2,176 2,424 1,882
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $109,091 $97,052 $84,224
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits
Now Accounts $15,475 $ 324 2.09% $14,583 $ 363 2.49% $11,532 $ 284 2.46%
Money Market Accounts 14,088 484 3.44 15,819 558 3.53 13,688 528 3.86
Savings Accounts 12,005 367 3.06 10,995 354 3.22 9,537 339 3.55
Certificates of Deposit 37,829 2,084 5.50 32,207 1,776 5.51 29,095 1,638 5.63
Repurchase Agreements 10,570 315 2.98 7,762 232 2.99 6,715 214 3.19
Note Payable 632 60 9.49 848 79 9.32 1,014 96 9.47
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities 90,599 3,634 4.01 82,214 3,362 4.09 71,581 3,099 4.33
==============================================================================================================================
Noninterest Bearing Liabilities
Demand deposit accounts 10,510 9,158 7,908
Other Liabilities 668 383 623
Stockholders' Equity 7,314 5,297 4,112
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $109,091 $97,052 $84,224
==============================================================================================================================
Interest rate spread 4.88% 4.68% 5.29%
==============================================================================================================================
Ratio of interest earning assets
to interest bearing liabilities 113.78% 111.20% 111.05%
Net interest income and net
interest margin $5,531 5.37% $4,659 5.10% $4,552 5.73%
==============================================================================================================================
</TABLE>
8
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
FINANCIAL CONDITION
The Company, through its Bank subsidiary, functions as a financial
intermediary, and as such its financial condition can be examined in terms of
developing trends in its sources and uses of funds. These trends are the result
of both external environmental factors, such as changing economic conditions,
regulatory changes and competition, and also internal environmental factors such
as management's evaluation as to the best use of funds in these changing
conditions.
Total assets increased by 20.56% during 1997 to $120.8 million from $100.2
million at December 31, 1996. Total deposits and securities sold under
agreements to repurchase, the Company's primary source of funds, increased $15.9
million or 17.01% to $109.4 million at December 31, 1997, from $93.5 million at
December 31, 1996. Time deposits comprise the largest portion of the Bank's
total deposits, totaling $41.7 million or 43.44% of the Bank's total deposits at
December 31, 1997. Savings and Money Market accounts totaled $24.7 million or
25.73% of the Bank's total deposits at December 31, 1997. NOW accounts total
$19.3 million or 20.10% of total deposits at December 31, 1997. Demand, non
interest bearing accounts total $10.3 million or 10.76% of total deposits at
December 31, 1997. Securities sold under agreements to repurchase increased $7.0
million to $13.3 million from $6.3 million at December 31, 1996, respectively.
The Company's primary use of funds are for loans and investments. Loans,
less deferred fees and discounts and the allowance for loan losses, increased by
$2.2 million or 3.20% to $71.0 million at December 31, 1997, from $68.8 million
a year earlier.
OPERATING RESULTS
The following discussion outlines some of the more important factors and
trends affecting the earnings of the Company, as presented in its consolidated
statements of income.
NET INTEREST INCOME
Net interest income is the difference between interest income and
interest expense and is generally impacted by increases or decreases in the
amount of outstanding interest earning assets and interest bearing liabilities
(volume variance). This volume variance coupled with changes in interest rates
on these same assets and liabilities (rate variance) equates to the total change
in net interest income in any given period. The table found on page 10 sets
forth certain information regarding changes in interest income and interest
expense attributable to (1) changes in volume (change in volume multiplied by
the old rate); (2) changes in rates (change in rate multiplied by the old
volume); and (3) changes in rate/volume (change in rate multiplied by change in
volume).
Net interest income for the year ended December 31, 1997, was $5.5
million, representing an increase of $871,000 or 18.53% from net interest income
of $4.7 million for the year ended December 31, 1996. The increase in net
interest income is due primarily to an increase in the balance of interest
earning assets, offset in part by an increase in interest bearing liabilities,
and is largely responsible for the Company's profitability. The net yield on
interest earning assets was 5.37% and 5.10% for the years ended December 31,
1997, and 1996 respectively.
9
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
RATE/VOLUME ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
===========================================================================================================================
1997 VS 1996 1996 VS 1995
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL DUE TO CHANGE IN TOTAL DUE TO CHANGE IN
-------------------- --------------------
CHANGE VOLUME RATE CHANGE VOLUME RATE
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
INTEREST INCOME ON:
Loans $ 967 $1,068 $(101) $101 $587 $(486)
Investment Securities (38) (111) 73 261 315 (54)
Federal Funds Sold and other
overnight investments 211 181 30 8 61 (53)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 1,140 1,138 2 370 963 (593)
INTEREST EXPENSE ON:
Now Accounts (39) 22 (61) 79 75 4
Money Market Accounts (74) (61) (13) 30 82 (52)
Savings Accounts 13 33 (20) 15 52 (37)
Certificates of Deposit 304 310 (6) 138 175 (37)
Repurchase Agreements 83 84 (1) 18 33 (15)
Note Payable (19) (20) 1 (17) (16) (1)
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 268 368 (100) 263 401 (138)
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 872 $ 770 $ 102 $107 $562 $(455)
===========================================================================================================================
INTEREST INCOME
The Company's interest income increased $1.2 million or 15.0% to $9.2
million at December 31, 1997, compared to $8.0 million at December 31, 1996. The
increase in interest income can be attributed to an increase of $11.7 million in
average earning assets, and an increase in the average yield on earning assets
to 8.89% in 1997 compared to 8.77% in 1996. Average loans increased $10.2
million or 16.48% which contributed substantially to the increase in interest
income.
INTEREST EXPENSE
The Company's interest expense increased $269,000 or 7.9% to $3.6 million
at December 31, 1997, compared to $3.4 million at December 31, 1996. The
increase in interest expense can be attributed to an increase of $8.4 million in
average interest bearing liabilities offset by a decrease in the cost of
interest bearing liabilities to 4.01% at December 31, 1997, compared to 4.09% in
1996. The increased growth in deposits and repurchase agreements were used to
fund loan growth and for general liquidity purposes.
NONINTEREST INCOME
The Company's primary source of noninterest income are fees charged for
services and gains and fees recognized on the sale of residential mortgage
loans. Noninterest income increased $175,000 or 29.81% to $762,000 at December
31, 1997, as compared to $587,000 in 1996. The growth in noninterest income was
primarily the result of an increase of $127,000 or 21.60% in service fees and
other charges, reflecting growth in the Bank's deposit accounts.
10
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NONINTEREST EXPENSE
Noninterest expense increased $858,000 or 19.62% to $5.2 million at
December 31, 1997, compared to $4.4 million at December 31, 1996. The increase
in noninterest expense was primarily due to a one time restructuring expense of
$796,000 during 1997, resulting from implementation of a revised business
strategy by the Board of Directors and senior management in February 1997. The
increase in expense includes a reduction of approximately $471,000 relating to
intangible assets acquired in the June 1990 acquisition of a failed savings and
loan association, severance payments and benefits of $102,000, branch
consolidation expense of $119,000, and $50,000 of other expense.
Personnel expense decreased $108,000 or 4.88% due to general staff
reductions. This reduction includes an increase in health and related benefits
of $43,000 or 24.4% in 1997 relating to the Company's self insured health plan.
Occupancy expense increased $104,000 or 14.23% due to scheduled rate
increases, the opening of the Bank's Severna Park branch office in September
1996 and additional maintenance expenses.
Other expense increased $127,000 or 10.83% due mainly to additional data
processing expense of approximately $111,000 or 26.6%. This was the result of
contractual price escalations by our third party data processor and rising
transaction volume due to additional deposit growth during 1997.
Amortization of intangible assets decreased $43,000 or 29.86% due to the
accelerated write off of the intangible assets related to the restructuring
expenses incurred in 1997. The amortization recorded for the year ended December
31, 1997, reflects a lower intangible asset balance amortized in 1997 and
subsequent years. The remaining intangible asset balance of $216,000 relates to
the core deposit premium paid for deposits and still retained by the Bank at
December 31, 1997.
PROVISION FOR INCOME TAXES
The Company and the Bank file consolidated federal income tax returns and
separate Maryland income tax returns. The Company has approximately $1.4 million
of net operating loss carryforwards, and net deferred tax assets of $766,000 at
December 31, 1997. The Company recognized a tax benefit during 1997 of $769,000.
FINANCIAL ANALYSIS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net income for the year ended December 31, 1996, totaled $423,000 or $0.29
per share compared to $792,000 or $0.57 per for the year ended December 31,
1995. This decrease in net income was attributable to a $134,000 increase in the
provision for loan losses and a $415,000 increase in operating expenses.
Net interest income increased $107,000 or 2.35% at December 31, 1996, to
$4.7 million from $4.6 million at December 31, 1995. This increase was the
result of an increase in interest income of $370,000, which was partially offset
by an increase in interest expense of $263,000.
Interest income increased $370,000 or 4.84% in 1996 compared to 1995,
primarily as a result of an increase in the average balance of loans
outstanding. Average loans outstanding, net of unearned income, increased $5.2
million or 9.21% during 1996. In addition, the average yield on loans decreased
to 10.43% in 1996 from 11.21% in 1995.
Interest expense increased $263,000 in 1996 as compared to 1995. The
increase generally reflected an increase in the balance of interest bearing
liabilities to $82.2 million from $71.6 million at December 31, 1995. During
this period the average cost of interest bearing liabilities decreased to 4.09%
at December 31, 1996, from 4.33% at December 31, 1995.
Noninterest income increased $66,000 or 12.67% during 1996 as compared to
1995. The increase was attributable to an increase in service fees and other
charges of $202,000 or 48.56% due to growth in the Bank's deposit base and was
partially offset by a decrease of $136,000 or 130.77%, due to a one time gain of
approximately $113,000 on the sale of loans guaranteed by the Small Business
Administration in 1995.
11
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
Noninterest expense increased $415,000 or 10.49% to $4.4 million at
December 31, 1996, from 4.0 million at December 31, 1995. The primary reason for
the increase was a $280,000 or 14.44% increase in personnel expense to $2.2
million at December 31, 1996, from $1.9 million at December 31, 1995, and a
$122,000 or 10.55% increase in operating expense to $1.2 million at December 31,
1996, from $1.1 million at December 31, 1995. The increase in personnel expense
was due to the opening of the new Severna Park branch office in September 1996,
and the hiring of additional personnel for the loan origination department.
Operating expenses increased due to additional expenses related to the Bank's
implementation of a check image product for its checking account customers, and
increased volumes of transaction and other savings accounts during the year.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed without considering the impact of
the upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the year 2000. The Company
primarily utilizes a third party vendor and such vendor's propriety software to
process its electronic data. The third party vendor is in the process of
modifying, upgrading, or replacing its computer software applications and
systems as necessary to accommodate the "year 2000" dating changes necessary to
permit correct recording of year dates for 2000 and later years. The vendor has
also engaged a consultant to review its year 2000 issues and has begun to
implement a year 2000 compliance program. The Company does not expect that the
cost of its year 2000 compliance program will be material to its financial
condition or results of operations and believes that it will be able to satisfy
such compliance program by the end of 1998 without any material disruption in
its operations. The Company does not currently have any information concerning
the compliance status of its suppliers and customers, other than the Bank's
third party data processing vendor. In the event that any of the Company's
significant suppliers do not successfully and timely achieve year 2000
compliance, the Company's business or operations could be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Deposits, commercial reverse repurchase agreements, and lines of credit
are the primary source of the Bank's funds for lending and investing activities.
Secondary sources of funds are derived from loan repayments and investment
maturities. Loan repayments and investment maturities can be considered a
relatively stable funding source, while deposit activity is greatly influenced
by interest rates, general market conditions and competition.
The Bank offers a variety of retail deposit account products to both
consumer and commercial deposit customers. The Bank's deposit accounts consist
of savings, NOW accounts, checking accounts, money market accounts and
certificate of deposit accounts. The Bank also offers individual retirement
accounts. Time deposits comprised 43.44% of the deposit portfolio at December
31, 1997. Core deposits considered to be noninterest bearing and interest
bearing demand deposit accounts, savings deposits, and money market accounts
accounted for 56.56% of the deposit portfolio at December 31, 1997.
The Bank intends to continue to emphasize retail deposit accounts as its
primary source of funds. Deposit products are promoted in periodic newspaper
advertisements, along with notices provided in customer account statements. The
Bank does not accept brokered deposits and held no such deposits at December 31,
1997. The Bank's market strategy is based on its reputation as a community bank
that provides quality products and personal customer service.
The Bank pays interest rates on its interest bearing deposit products that
are competitive with rates offered by other financial institutions in its market
area, and in certain deposit categories may lead the market. Interest rates on
deposits are reviewed weekly by management who consider a number of factors
including: (1) the Bank's internal cost of funds; (2) rates offered by competing
financial institutions; (3) investing and lending opportunities; and (4) the
Bank's liquidity position.
12
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
Jumbo Certificates of Deposits. Jumbo certificates of deposit are accounts
of $100,000 or more. These accounts totaled $5.9 million at December 31, 1997
and consisted principally of time certificates of deposit. The following table
sets forth the amount and maturity of jumbo certificates of deposit at December
31, 1997.
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================
GREATER THAN ONE YEAR
THREE MONTHS THREE MONTHS TO GREATER THAN
OR LESS TO ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S><C>
$1,722 $3,838 $337 $-0- $5,897
=============================================================================================
</TABLE>
Commercial reverse repurchase agreements represent transactions with
customers for correspondent or commercial account cash management services.
These are overnight borrowing arrangements with interest rates discounted from
the federal funds sold rate. Securities underlying the repurchase agreements are
maintained in the Company's control. At December 31, 1997, and 1996, the average
cost of these borrowings were 2.98% and 2.99% respectively.
The Bank maintains a borrowing line with the Federal Home Loan Bank
(FHLB), and may borrow up to $5.0 million under a reverse repurchase line
established with a local correspondent commercial bank. In addition, the Bank
has the ability to borrow directly from the Federal Reserve Bank discount
window. At December 31, 1997, there were no outstanding advances under these
lines of credit.
Potential adverse impacts on liquidity can occur as a result of changes in
the estimated cash flows from investment, loan, and deposit portfolios. The Bank
manages this inherent risk by maintaining a portfolio of available for sale
investments, and secondary sources of liquidity from FHLB advances and reverse
repurchase agreements. In addition, the Bank has the ability to increase its
liquidity by raising interest rates on deposit accounts, selling loans in the
secondary market or curtailing the volume of loan originations.
The Bank maintains the majority of the assets held for liquidity purposes
in overnight federal funds.
INTEREST RATE RISK SENSITIVITY
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of the Company's interest earning assets
and funding sources. Additionally, the Bank's profitability is dependent to a
large extent upon its net interest income, which is the difference between its
interest income on interest bearing assets, such as loans and investments, and
its interest expense on its funding sources, such as deposits and borrowings.
Accordingly, the Bank's results of operations and financial condition are
largely dependent on movements in market interest rates and its ability to
manage its assets in response to such movements.
The Bank attempts to manage fluctuations in interest rates by matching the
maturities of its interest earning assets and interest bearing liabilities. The
Bank's current strategy to manage its sensitivity to interest rate fluctuations
is to emphasize short term and adjustable rate loans and to invest in short term
U.S. Government agency securities with maturities or call dates of two years or
less. Additionally, all of the loans in the Bank's portfolio are either
adjustable or short term fixed rate loans with terms to maturity of 30 days to
30 years. The Bank does not engage in long term fixed rate portfolio lending.
Any long term fixed rate loans made by the Bank are sold in the secondary
market.
13
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
The following table summarizes the anticipated maturities or repricing of
the Company's interest earning assets and interest bearing liabilities as of
December 31, 1997, and the Company's interest sensitivity gap (i.e., interest
earning assets less interest bearing liabilities). A positive gap for any time
period indicates that more interest earning assets will mature or reprice during
that period than interest bearing liabilities. The Company's goal is generally
to maintain a balanced cumulative gap position for the period of one year or
less in order to mitigate the impact of changes in interest rates on liquidity,
interest margins and operating results.
The analysis presented below represents a static gap position for
interest sensitive assets and liabilities at December 31, 1997, and does not
give effect to prepayment or extension of loans as a result of changes in
general market rates.
INTEREST SENSITIVITY GAP ANALYSIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
===========================================================================================================================
AFTER THREE
WITHIN BUT WITHIN AFTER ONE
THREE TWELVE BUT WITHIN AFTER
MONTHS MONTHS FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
Federal funds sold and other
overnight investments $20,744 $ 0 $ 0 $ 0 $ 20,744
Investment securities (1) 6,944 6,974 5,022 980 19,920
Loans (2), (3) 47,810 7,325 14,618 1,898 71,651
- ---------------------------------------------------------------------------------------------------------------------------
$75,498 $ 14,299 $19,640 $ 2,878 $112,315
===========================================================================================================================
LIABILITIES
Interest-bearing deposits
NOW Accounts $19,273 $ 0 $ 0 $ 0 $ 19,273
Savings Accounts 12,448 0 0 0 12,448
Money Market Accounts 12,282 0 0 0 12,282
Certificate of deposits (4) 10,308 28,128 3,204 89 41,729
Repurchase Agreements 13,306 0 0 0 13,306
- ---------------------------------------------------------------------------------------------------------------------------
$67,617 $ 28,128 $ 3,204 $ 89 $ 99,038
===========================================================================================================================
Interest sensitivity gap $ 7,881 $(13,829) $16,436 $ 2,789 $ 13,277
Cumulative interest sensitivity gap $ 7,881 $ (5,948) $10,488 $13,277
Cumulative interest sensitivity gap as a
percentage of total assets 6.52% (4.92)% 8.68% 10.99%
===========================================================================================================================
</TABLE>
(1) Net of Federal Reserve Bank and Federal Home Loan Bank stock.
(2) Loans scheduled by contractual maturities.
(3) Net of non-accrual loans of $778,000.
(4) Certificates of deposits scheduled by contractual maturities.
14
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
INVESTMENT PORTFOLIO
At December 31, 1997, the Bank's investment portfolio, which totaled $20.5
million, consisted primarily of U.S. treasury and government agency securities
and one mortgage-backed security. Of this amount, $18.9 million, or 92.2%, were
U.S. treasury securities and U.S. government agency obligations. The
mortgage-backed security totaled $980,000 which was issued by Freddie Mac.
Additionally, the Company owns $327,250 in stock of the Federal Reserve Bank of
Richmond and $292,900 in stock of the Federal Home Loan Bank of Atlanta (FHLB).
Management generally maintains an investment portfolio with relatively short
maturities to minimize overall interest rate risk. At December 31, 1997,
approximately 67.8% of the investment securities portfolio had maturities of one
year or less.
Investment decisions are made within policy guidelines established by the
Board of Directors. It is the Bank's policy to invest in non-speculative debt
instruments, particularly debt instruments that are guaranteed by the U.S.
Government or an agency thereof, to maintain a diversified investment portfolio
which complements the overall asset/liability and liquidity objectives of the
Bank, while limiting the related credit risk to an acceptable level. To meet the
credit risk objectives, nongovernment debt instruments must have a rating of "B"
or better to be held in the portfolio. The Bank's investment policy designates
the investment portfolio to be classified as "available-for-sale", unless
otherwise designated. At December 31, 1997, approximately $16.6 million, or
80.7% of the investment portfolio was classified available-for-sale.
The Composition of Securities at December 31, for each of the past three
fiscal years was:
==============================================================================
1997 1996 1995
- ------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasury $ 1,974 $ 9,157 $16,186
U.S. Agency 12,991 996 978
Mortgage-backed 980 987 984
Equity securities 620 194 175
- ------------------------------------------------------------------------------
Total 16,565 11,334 18,323
HELD-TO-MATURITY
U.S. Treasury 3,975 1,993 --
- ------------------------------------------------------------------------------
Total 3,975 1,993 --
- ------------------------------------------------------------------------------
Total Securities $20,540 $13,327 $18,323
==============================================================================
15
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
The following table presents maturties and weighted average yields for
investments in available for sale and held to maturity securities.
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
===========================================================================================================================
YEARS TO MATURITY
- ---------------------------------------------------------------------------------------------------------------------------
WITHIN OVER 1 OVER 5 OVER
1 THROUGH 5 THROUGH 10 10
- ---------------------------------------------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL YIELD
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Investments
Available-For-Sale
U.S. Treasury $1,974 5.88% $ -- --% $ -- --% $-- --% $ 1,974 5.88%
U.S. Agency 7,969 5.65 5,022 6.28 -- -- -- -- 12,991 5.90
Mortgage-backed -- -- -- -- 980 5.79% -- -- 980 5.79
Total Debit Securities $9,943 5.70% $5,022 6.28% $980 5.79% $-- --% 15,945 5.89%
===========================================================================================================================
Equity Securities 620
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments
Available-For-Sale $16,565
===========================================================================================================================
Investments Held-To-Maturity
U.S. Treasury $3,975 5.64% $ -- --% $ -- --% $-- --% $ 3,975 5.64%
Total Investments
Held-To-Maturity $3,975 5.64% $ -- --% $ -- --% $-- --% $ 3,975 5.64%
===========================================================================================================================
</TABLE>
LENDING ACTIVITIES
The types of loans that the Bank may originate are subject to federal laws
and regulations. Interest rates charged by the Bank on loans are affected by the
demand for such loans and the supply of money available for lending purposes and
the rates offered by competitors. These factors are, in turn, affected by, among
other things, economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, and legislative tax policies.
ANALYSIS OF LOANS
The following table presents the composition of the loan portfolio over
the previous five years.
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
===========================================================================================================================
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
Commercial loans $30,749 42.61% $30,469 43.80% $27,727 48.94% $27,025 47.14% $19,724 48.33%
Real estate:
Commercial 20,448 28.34 17,845 25.65% 13,553 23.92 5,601 9.77 12,806 31.38
Construction 10,035 13.91 10,173 14.62 7,937 14.01 8,672 15.12 345 0.85
One-to four-family 5,232 7.25 7,002 10.07 4,391 7.75 12,798 22.32 5,637 13.82
Home equity 3,393 4.70 1,744 2.51 1,197 2.11 1,016 1.77 615 1.51
Consumer loans 2,306 3.19 2,332 3.35% 1,848 3.27 2,226 3.88 1,676 4.11
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 72,162 100.00% 69,565 100.00% 56,653 100.00% 57,338 100.00% 40,803 100.00%
Less:
Allowance for loan losses (1,177) (765) (617) (687) (574)
- ---------------------------------------------------------------------------------------------------------------------------
Net loans receivable $70,985 $68,800 $56,036 $56,651 $40,229
===========================================================================================================================
</TABLE>
16
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
The Bank's loan portfolio consists of commercial, commercial real estate,
residential construction, one- to four-family residential mortgage, home equity
and consumer loans. At December 31, 1997, the Bank's loan portfolio totaled
$72.2 million, of which $30.7 million, or 42.61%, were commercial loans; $20.4
million, or 28.34%, were commercial real estate loans; $10.0 million, or 13.91%,
were construction loans; $5.2 million, or 7.25%, were one- to four-family
residential mortgage loans; $3.4 million, or 4.70% were home equity loans and
$2.3 million, or 3.19%, were consumer and other loans. All of the loans in the
Bank's portfolio are either adjustable-rate or short term fixed-rate loans with
terms to maturity of 30 days to 30 years.
The Bank does not engage in longer term fixed-rate portfolio lending. Any
long term fixed-rate loans made by the Bank are sold in the secondary market.
Commercial Lending. The Bank offers commercial business loans to
businesses operating in the Bank's primary market area. These loans consist of
lines of credit which require an annual repayment, adjustable-rate loans with
terms of five to seven years, and short term fixed-rate loans with terms of up
to three years. Such loans are offered in amounts up to $750,000 and are
generally secured by receivable, inventories, equipment and other assets of the
business. The Bank generally requires personal guarantees on its commercial
loans. The Bank also offers unsecured commercial loans to businesses on a
selective basis. These types of loans are made to existing customers and are of
a short duration, generally one year or less, up to $500,000. The Bank also
originates commercial loans which are guaranteed by the Small Business
Administration. The Bank has been an active participant in a variety of SBA loan
programs.
Commercial business loans are generally of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. In order to reduce the overall risk and
cost of its loan portfolio, the Bank intends to reduce the ratio of commercial
loans to total loans and may reduce the level of its SBA loans.
Commercial Real Estate Lending. The Bank originates adjustable-rate
commercial real estate loans that are generally secured by properties used for
business purposes such as small office buildings or a combination of residential
and retail facilities located in the Bank's primary market area. The Bank's
underwriting procedures provide that commercial real estate loans may generally
be made in amounts up to 80% of the lower of the appraised value or sales price
of the property, subject to the Bank's current loans-to-one-borrower limit,
which at December 31, 1997, was $1.7 million. These loans may be made with terms
up to 25 years and are generally offered at interest rates which adjust annually
or annually after an initial three year period in accordance with the prime rate
as reported in the Wall Street Journal. In reaching a decision as to whether or
not to make a commercial real estate loan, the Bank considers the value of the
real estate to be financed and the credit strength of the borrower and/or the
lessee of the real estate project. The Bank has generally required that the
properties securing commercial real estate loans have debt service coverage
ratios of at least 1.2 times.
Loans secured by commercial real estate properties generally involve
larger principal amounts and a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of such loans may be subject to adverse conditions
in the real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified on
the basis of the property's value, debt service ratio and, under certain
circumstances, additional collateral.
Construction Lending. The Bank originates construction loans on both one-
to four-family residences and on commercial real estate properties. The Bank
originates two types of residential con-
17
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
struction loans, consumer and builder. The Bank originates consumer construction
loans to build a primary residence, a secondary residence, or an investment or
rental property. The Bank will originate builder construction loans to companies
engaged in the business of constructing homes for resale. These loans may be for
homes currently under contract for sale, model homes from which other homes will
be marketed within a subdivision or, on a very limited basis, homes built for
speculative purposes to be marketed for sale during construction. Although the
Bank attempts to procure permanent end financing, many of the Bank's
construction loans, at the time entered into with the Bank, have permanent end
financing committed by other financial institutions.
The Bank originates land acquisition and development loans with the
source of repayment being either the sale of finished lots or the sale of homes
to be constructed on the finished lots. The Bank will originate land
acquisition, development, and construction loans on a revolving line of credit
basis for subdivisions whereby the borrower may draw upon such line of credit as
lots are sold for the purpose of improving additional lots. Construction loans
are generally offered with terms up to six months for consumer loans, up to
twelve months for builder loans, and up to eighteen months for land development
loans.
Construction loans are generally made in amounts up to 80% of the value of
the security property. During construction, loan proceeds are disbursed in draws
as construction progresses based upon inspections of work in place by
independent construction inspectors.
At December 31, 1997, the Bank had construction loans, including land
acquisition and development loans totaling $10.0 million, or 13.91% of the
Bank's total loan portfolio, of which $7.2 million consisted of one- to
four-family residential construction loans, $851,000 consisted of commercial
real estate construction loans and $2.0 million consisted of land acquisition
and development loans.
Construction loans are generally considered to involve a higher degree of
credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the security property's value upon completion of
construction as compared to the estimated costs of construction, including
interest. Also, the Bank assumes certain risks associated with the borrowers'
ability to complete construction timely and in a workmanlike manner. If the
estimate of value proves to be inaccurate, or if construction is not performed
timely or accurately, the Bank may be confronted with a project which, when
completed, has a value which is insufficient to assure full repayment.
One- to Four-Family Residential Mortgage Lending. The Bank currently
offers both fixed-rate and adjustable-rate mortgage loans, first and second
mortgage loans secured by one- to four-family residences and lots for one- to
four-family residences located throughout Central Maryland. It is currently the
general policy of the Bank to originate for sale in the secondary market one- to
four-family fixed-rate residential mortgage loans which conform, except as to
size, to the underwriting standards of Fannie Mae, and Freddie Mac, and to
originate for investment adjustable rate one- to four-family residential
mortgage loans. The Bank generally does not retain the servicing rights of loans
it sells and sells such loans without recourse, with the exception of a recourse
in the event of breaches for any representations or warranties made by the Bank.
The Bank recognizes, at the time of sale, the cash gain or loss on the sale of
the loans based on the difference between the net cash proceeds received and the
carrying value of the loans sold. One- to four-family mortgage loan originations
are generally obtained from the Bank's loan representatives and their contacts
with the local real estate industry, direct contacts made by the Bank's and the
Company's directors, existing or past customers, and members of the local
communities.
At December 31, 1997, one- to four-family residential mortgage loans
totaled $5.2 million, or 7.25%, of total loans. Of the one- to four-family
mortgage loans outstanding at that date, $1.6 million were fixed-rate loans with
terms of up to three years with a balloon payment at the end of the term and
$3.6 million were adjustable-rate mortgage loans. The Bank currently offers a
number of adjustable-rate mortgage loans with terms of up to 30 years and
interest rates which adjust annually from the outset of the loan or which adjust
annually after a 1 or 3 year initial period in which the
18
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
loan has a fixed rate. The interest rates for the majority of the Bank's
adjustable-rate mortgage loans are indexed to the one year Treasury Constant
Maturity Index. Interest rate adjustments on such loans are limited to a 2%
annual adjustment cap with a maximum adjustment of 6% over the life of the loan.
The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps to reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Although the Bank offers adjustable-rate loans at below
market interest rates, all loans are underwritten to assure that the borrower is
qualified on a fully-indexed basis.
Periodic and lifetime caps on interest rate increases help to reduce the
risks associated with the Bank's adjustable-rate loans, but also limit the
interest rate sensitivity of its adjustable-rate mortgage loans.
The Bank currently originates one- to four-family residential mortgage
loans in amounts up to 80% of the lower of the appraised value or the selling
price of the property securing the loan. Mortgage loans originated by the Bank
generally include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Bank's consent.
Due-on-sale clauses are an important means of adjusting the yields on the Bank's
fixed-rate mortgage loan portfolio and the Bank has generally exercised its
rights under these clauses.
Home Equity Lending. As of December 31, 1997, home equity loans totaled
$3.4 million, or 4.70% of the Bank's total loan portfolio. Fixed-rate,
fixed-term home equity loans and adjustable rate home equity lines of credit are
offered in amounts up to 100% of the appraised value with a maximum loan amount
of $100,000. Fixed-rate, fixed-term home equity loans are offered with terms up
to five years and home equity lines of credit are offered with terms up to
twenty years. Substantially all of the Bank's home equity loans are adjustable
rate and reprice with changes in the WSJ prime rate.
Consumer Lending. The Bank's portfolio of consumer loans primarily
consists of adjustable rate, personal lines of credit and installment loans
secured by new or used automobiles, new or used boats, and loans secured by
deposit accounts. Unsecured consumer loans are made with a maximum term of three
years and a maximum loan amount based on a borrower's financial condition. At
December 31, 1997, consumer loans totaled $2.3 million or 3.19% to total loans
outstanding. Consumer loans are generally originated in the Bank's primary
market area.
CREDIT RISK MANAGEMENT
The Bank's allowance for loan losses is established through a provision
for loan losses based on management's evaluation of the risks inherent in its
loan portfolio and the general economy. The allowance for loan losses is
maintained at an amount management considers adequate to cover estimated losses
in loans receivable which are deemed probable and estimable based on information
currently known to management. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to make additional provisions for estimated
loan losses based upon judgments different from those of management. As of
December 31, 1997, the Bank's allowance for loan losses was $1.2 million or 1.6%
of total loans and 102.44% of non-performing loans as compared to $765,000, or
1.1% of total loans and 38.35% of non-performing loans as of December 31, 1996.
The Bank had total non-performing loans of $1.1 million and $2.0 million at
December 31, 1997 and December 31, 1996, respectively, and non-performing loans
to total loans of 1.59% and 2.87%, at December 31, 1997, and December 31, 1996,
respectively.
19
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
The Bank continues to monitor and modify its allowances for loan losses as
conditions dictate. While management believes that, based on information
currently available, the Bank's allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time, no assurances can be given
that the Bank's level of allowance for loan losses will be sufficient to cover
future loan losses incurred by the Bank or that future adjustments to the
allowance for loan losses will not be necessary if economic and other conditions
differ substantially from the economic and other conditions at the time
management determined the current level of the allowance for loan losses.
Management may in the future increase its level of loan loss allowances as a
percentage of total loans and non-performing loans as its loan portfolio
increases.
ANALYSIS OF CREDIT RISK
Activity in the allowance for loan losses for the preceding two years
ended December 31 is shown below:
AT DECEMBER 31,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------
<S><C>
Total loans outstanding $72,162 $69,565
Average loans outstanding 72,385 62,144
Allowance for loan losses at beginning of period 765 617
Provision charged to expense 748 452
- ----------------------------------------------------------------------------------------------
Chargeoffs:
Residential/commercial real estate 0 15
Commercial loans 362 279
Consumer and other loans 6 28
- ----------------------------------------------------------------------------------------------
Total 368 322
- ----------------------------------------------------------------------------------------------
Recoveries:
Residential/commercial real estate 9 8
Commercial loans 21 10
Consumer and other loans 2 --
- ----------------------------------------------------------------------------------------------
Total 32 18
- ----------------------------------------------------------------------------------------------
Net chargeoffs 336 304
- ----------------------------------------------------------------------------------------------
Allowance for loan losses at end of period $ 1,177 $ 765
==============================================================================================
Allowance for loan losses as a percent of total loans 1.63% 1.10%
Net chargeoffs as a percent of average loans .46% .49%
==============================================================================================
</TABLE>
CAPITAL MANAGEMENT
During 1997 Stockholders' Equity increased $5.6 million or 101.82% to
$11.1 million from $5.5 million at December 31, 1996. The increase was due
primarily to the successful completion on September 30, 1997, of the Company's
initial public stock offering which sold an additional 833,334 shares of common
stock at $6.00 per share. As a result, the Company's common shares outstanding
increased 56.35% to 2,312,306 at December 31, 1997, from 1,478,972 at December
31, 1996.
In April, 1997, the Company's employee incentive stock option plan was
approved by shareholders at the annual meeting. Under the plan, up to 100,000
shares of the Company's common stock may be awarded under the direction of the
Company's compensation committee. Incentive stock options vest over a five year
period. At December 31, 1997, 64,000 shares of common stock were granted under
the plan and 6,500 shares were forfeited.
See Note 13 to the Consolidated Financial Statements for more information
on the Company's stock option plan.
20
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
REGULATORY CAPITAL REQUIREMENTS
The OCC's capital regulations require national banks to meet two minimum
capital standards: a 3% Tier 1 capital to total adjusted assets ratio for the
most highly rated banks (at least 100 to 200 basis points more for other
national banks) (the "leverage" ratio) and an 8% risk-based capital ratio. Tier
1 capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships.
The risk-based capital standard requires the maintenance of Tier 1 and
total capital (which is defined as Tier 1 capital plus Tier 2 capital) to
risk-weighted assets of at least 4% and 8%, respectively. In determining the
amount of risk-weighted assets, all assets, including certain off-balance sheet
assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the
OCC capital regulation based on the risks the agency believes are inherent in
the type of asset. The regulators have recently added a market risk adjustment
to cover a bank's trading account, foreign exchange and commodity positions. The
components of Tier 1 capital are equivalent to those discussed above. Tier 2
capital may include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital included
as part of total capital cannot exceed 100% of Tier 1 capital.
At December 31, 1997, the Bank's tier 1 and total risk based capital ratio
were 14.50% and 15.80% respectively. The Bank was considered well capitalized
for regulatory purposes. See Note 14 of the Consolidated Financial Statements
for more information on the Bank's risk based capital ratios.
REGULATION AND SUPERVISION
The Company, by virtue of its control of the Bank, is a registered bank
holding company as amended under the Bank Holding Company Act of 1956 ("the
Act"). As a bank holding company, the Company is required to file certain
reports with, and otherwise comply with the rules and regulations of, the
Federal Reserve Board ("FRB") under the BHCA.
The activities of national banks, such as the Bank, are generally governed
by the National Bank Act and the Federal Deposit Insurance Act. The Bank is
subject to extensive regulation, examination and supervision by the Office of
the Comptroller of the Currency (the "OCC"), as its primary federal regulator,
and the FDIC, as the deposit insurer. The Bank's deposit accounts are insured up
to applicable limits by the FDIC's Bank Insurance Fund ("BIF"). The Bank must
file reports with the OCC and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of other
institutions. The OCC and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
Many aspects of the Bank's operations are regulated by federal law including
allowable activities, reserves against deposits, branching, mergers and
investments. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OCC, the
FDIC or the Congress, could have a material adverse impact on the Company or the
Bank and their operations.
21
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
MARKET VALUE AND DIVIDEND INFORMATION
The Company's Common stock is listed on The NASDAQ Stock MarketSM and
trades under the symbol "ANNB". The Company's stock began trading on October 1,
1997, with an opening bid of $7.75 per share. The Company has traded an average
daily volume of 9,175 shares from October 1, 1997 through December 31, 1997. At
December 31, 1997 the closing bid price was $10.50 per share.
The Company's high and low stock price during the last quarter of 1997 was
$11.625 and $7.75 respectively. As of March 12, 1998 the Company has outstanding
2,312,306 shares of common stock and no preferred stock issued or outstanding.
The Company has not paid a dividend to stockholders in the past and does not
anticipate paying dividends in the near future. The Company intends to retain
its capital to allow for balance sheet growth while maintaining adequate capital
reserves.
22
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
ROWLES
& Company, LLP
Certified Public Accountants
Report of Independent Auditors
The Board of Directors and Stockholders
Annapolis National Bancorp, Inc. and Subsidiary
Annapolis, Maryland
We have audited the accompanying consolidated balance sheet of Annapolis
National Bancorp, Inc. and Subsidiary as of December 31, 1997, and the related
statements of income, changes in stockholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The consolidated financial
statements of Annapolis National Bancorp, Inc. and Subsidiary for the years
ended December 31, 1996 and 1995 were audited by other auditors whose report
dated January 23, 1997, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Annapolis
National Bancorp, Inc. and Subsidiary as of December 31, 1997, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed
its method of reporting earnings per share in 1997.
/s/ Rowles & Company LLP
------------------------
Baltimore, Maryland
January 29, 1998
23
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
===========================================================================================================================
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
Cash and due from banks $ 5,611,407 $ 6,083,554
Federal funds sold and other overnight investments 20,743,973 4,378,730
Securities purchased under agreement to resell -- 4,750,000
Investment securities available for sale 16,565,290 11,334,273
Investment securities held to maturity (market value of
$3,891,830 and $1,985,625) 3,975,296 1,992,835
Loans, less allowance for credit losses of $1,177,437 and $765,000 70,985,232 68,800,397
Premises and equipment 1,238,887 1,334,825
Core deposit premium and other intangibles 216,315 788,301
Accrued interest receivable 515,549 436,722
Other real estate owned 42,637 140,000
Deferred income taxes 765,868 --
Other assets 166,848 187,544
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $120,827,302 $100,227,181
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits $ 96,061,762 $ 87,105,995
Securities sold under agreements to repurchase 13,305,780 6,344,959
Accrued interest payable and other liabilities 372,446 301,797
Note and accrued interest payable to stockholder -- 1,003,661
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 109,739,988 94,756,412
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized 10,000,000 shares;
issued and outstanding 2,312,306 shares in 1997 and 1,478,972 shares in 1996 23,123 14,789
Capital surplus 13,135,320 8,633,560
Retained earnings (deficit) (2,077,844) (3,162,041)
- ---------------------------------------------------------------------------------------------------------------------------
11,080,599 5,486,308
Unrealized gain (loss) on investment securities available for sale 6,715 (15,539)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,087,314 5,470,769
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $120,827,302 $100,227,181
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
===========================================================================================================================
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
INTEREST INCOME
Loans, including fees $7,447,970 $6,481,532 $6,379,798
Federal funds sold and securities purchased under
agreements to sell 776,452 564,873 556,901
U.S. Treasury securities and obligations of other
U.S. Government agencies 937,019 974,939 714,472
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 9,161,441 8,021,344 7,651,171
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 283,053 237,863 206,630
Other deposits 2,973,123 2,813,535 2,582,008
Securities sold under agreements to repurchase 314,943 231,514 214,431
Interest on borrowed funds 59,574 78,759 95,546
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,630,693 3,361,671 3,098,615
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 5,530,748 4,659,673 4,552,556
PROVISION FOR CREDIT LOSSES 747,908 452,190 318,370
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 4,782,840 4,207,483 4,234,186
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Gain (loss) on sale of loans, securities, equipment,
and other real estate 17,000 (31,696) 104,182
Service charges and other 745,064 618,501 416,363
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 762,064 586,805 520,545
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Personnel 2,111,176 2,219,380 1,938,920
Occupancy and equipment 834,943 730,927 718,655
Marketing and advertising 88,142 104,947 68,817
Other operating 1,299,398 1,172,854 1,086,997
Restructuring 795,570 -- --
Amortization of intangible assets acquired 100,805 143,640 143,639
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 5,230,034 4,371,748 3,957,028
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 314,870 422,540 797,703
Income tax expense (benefit) (769,327) -- 6,000
- ---------------------------------------------------------------------------------------------------------------------------
Net income $1,084,197 $ 422,540 $ 791,703
===========================================================================================================================
Basic earnings per share $ 0.64 $ 0.29 $ 0.57
===========================================================================================================================
Diluted earnings per share $ 0.63 $ 0.29 $ 0.57
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
=============================================================================================================================
COMMON STOCK UNREALIZED TOTAL
------------------------ CAPITAL RETAINED GAIN (LOSS) STOCKHOLDERS'
SHARES PAR VALUE SURPLUS EARNINGS ON SECURITIES EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
<S><C>
Balance, December 31, 1994 541,300 $ 5,413 $ 5,379,686 $ (4,376,284) $ (249,189) $ 759,626
Sale of common stock 937,672 9,376 3,253,874 -- -- 3,263,250
Net income -- -- -- 791,703 -- 791,703
Change in unrealized loss -- -- -- -- 231,243 231,243
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,478,972 14,789 8,633,560 (3,584,581) (17,946) 5,045,822
Net income -- -- -- 422,540 -- 422,540
Change in unrealized loss -- -- -- -- 2,407 2,407
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,478,972 14,789 8,633,560 (3,162,041) (15,539) 5,470,769
Sale of stock, net of costs 833,334 8,334 4,501,760 -- -- 4,510,094
Net income -- -- -- 1,084,197 -- 1,084,197
Change in unrealized loss -- -- -- -- 22,254 22,254
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,312,306 $23,123 $13,135,320 $(2,077,844) $ 6,715 $11,087,314
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
===========================================================================================================================
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 1,084,197 $ 422,540 $ 791,703
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 197,955 187,311 148,344
Provision for loan losses 747,908 452,190 318,370
Deferred income taxes (769,327) -- --
Amortization of premiums and accretion of discounts, net (453,932) 10,152 (136,627)
Amortization of intangible assets 571,986 143,640 143,639
Loss (gain) on sales of loans, securities,
equipment, and other real estate owned 43,826 31,696 (104,182)
Decrease (increase) in
Accrued interest receivable (78,827) (16,544) (29,249)
Other assets 71,461 (203,523) 52,504
Increase (decrease) in
Accrued interest payable (155,441) (16,787) 95,546
Accrued income taxes (7,487) -- --
Deferred origination fees (65,463) 141,367 (39,698)
Other liabilities 70,829 138,992 23,225
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided from operations 1,257,685 1,291,034 1,263,575
===========================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities held to maturity -- 22,642,605 9,080,902
Purchase of securities held to maturity (1,890,901) (1,946,528) --
Proceeds from maturities of securities available for sale 52,960,000 1,979,884 4,252,645
Purchase of securities available for sale (57,802,932) (17,687,193) (24,776,098)
Net decrease (increase) in federal funds (16,365,243) 844,428 (897,622)
Loans made, net of principal collected (2,867,280) (13,216,953) (2,210,753)
Proceeds from sales of loans -- -- 2,619,770
Purchases of and deposits on premises, equipment,
and software (206,121) (524,964) (720,071)
Proceeds from sale of equipment 17,000 -- --
Acquisition of other real estate owned (11,325) (140,000) (16,412)
Proceeds from sale of other real estate owned 108,688 463,523 --
Net (increase) decrease in securities purchased under
agreement to resell 4,750,000 3,000,000 (5,250,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities $(21,308,114) $ (4,585,198) $(17,917,639)
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
===========================================================================================================================
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S><C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
Time deposits $13,052,660 $(4,235,342) $7,574,901
Other deposits (4,096,893) 9,245,080 8,403,074
Securities sold under repurchase agreements 6,960,821 (625,264) 2,228,820
Repayment long-term debt principal (848,400) -- --
Proceeds from sale of stock 4,510,094 -- 88,250
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 19,578,282 4,384,474 18,295,045
===========================================================================================================================
Net increase (decrease) in cash and cash equivalents (472,147) 1,090,310 1,640,981
Cash and cash equivalents at beginning of year 6,083,554 4,993,244 3,352,263
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,611,407 $ 6,083,554 $4,993,244
===========================================================================================================================
Supplemental Cash Flow Information
Interest paid, including interest credited to accounts $ 3,786,134 $ 3,282,912 $3,003,069
Income taxes paid 7,487 -- 6,000
Non-Cash Activities
Conversion of stockholder note to common stock -- -- 3,175,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies in the financial statements conform
to generally accepted accounting principles and to general practices within the
banking industry. Management makes estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. These estimates and
assumptions may affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
BUSINESS
The Company was incorporated on May 26, 1988, under the laws of the State
of Maryland to serve as a bank holding company and formed Annapolis National
Bank (the Bank) as a wholly owned subsidiary. The Company is registered as a
bank holding company and the Bank is chartered as a national bank. The Company
(as a bank holding company) and the Bank (as a nationally chartered bank) are
subject to governmental supervision, regulation, and control.
In late 1993, the Bank formed a new company, ANB Mortgage Services, LLC
(ANB Mortgage) for the purpose of originating and servicing residential
construction loans. ANB Mortgage assets and liabilities and its results of
operations are consolidated on the accompanying financial statements. This
company was liquidated in 1997.
The principal business of Annapolis National Bank is to make loans and
other investments and to accept time and demand deposits. The Bank's primary
market area is in Anne Arundel County, Maryland, although the Bank's business
development efforts generate business outside of the area. The Bank offers a
broad range of banking products, including a full line of business and personal
savings and checking accounts, money market demand accounts, certificates of
deposit, travelers checks, certified checks, U.S. Savings Bond application and
redemption, Mastercard/VISA/American Express credit card and merchant deposit
services, federal tax depository services, individual retirement accounts, money
orders, money wire transfers, the MOST automated teller product, and other
banking services.
The Bank funds a variety of loan types including commercial and
residential real estate loans, commercial term loans and lines of credit,
consumer loans, and letters of credit. The Bank's customers are primarily
individuals and small businesses.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Annapolis National Bank. All significant
intercompany balances and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks.
INVESTMENT SECURITIES
As securities are purchased, management determines if the securities
should be classified as held to maturity or available for sale. Securities which
management has the intent and ability to hold to maturity are recorded at
amortized cost which is cost adjusted for amortization of premiums and accretion
of discounts to maturity, or over the expected life of mortgage-backed
securities. Securities which may be sold before maturity are classified as
available for sale and carried at fair value with unrealized gains and losses
included in stockholders' equity on an after-tax basis. Investments in Federal
Home Loan Bank and Federal Reserve stock are included with securities classified
as available for sale and carried at cost.
29
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans are stated at face value, plus deferred origination costs, less
unearned discounts, deferred origination fees, and the allowance for credit
losses.
Interest on loans is credited to income based on the principal amounts
outstanding. Origination fees and costs are amortized to income over the
contractual life of the related loans as an adjustment of yield. Discounts on
the purchase of mortgage loans are amortized to income over the contractual
lives of the loans.
Accrual of interest on a loan is discontinued when the loan is delinquent
more than ninety days unless the collateral securing the loan is sufficient to
liquidate the loan. Management considers all loans where the accrual of interest
has been discontinued to be impaired.
The allowance for loan losses represents an amount which, in management's
judgment, will be adequate to absorb possible losses on existing loans that may
become uncollectible. Management's judgment in determining the adequacy of the
allowance is based on evaluations of the collectibility of loans. These
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrowers'
ability to pay. If the current economy or real estate market were to suffer a
severe downturn, the estimate for uncollectible accounts would need to be
increased. Loans which are deemed uncollectible are charged off and deducted
from the allowance. The provision for loan losses and recoveries on loans
previously charged off are added to the allowance.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed over the estimated
useful lives using the straight-line method. Leasehold improvements are
amortized over the terms of the leases or the estimated useful lives of the
improvements, whichever is shorter.
INTANGIBLE ASSETS
Net assets acquired in purchase transactions are recorded at fair value at
the date of acquisition. Core deposit premiums are amortized on a straight line
basis over the estimated period benefited.
REAL ESTATE OWNED
Real estate acquired in satisfaction of a debt is carried at the lower of
cost or net realizable value. Costs incurred in maintaining foreclosed real
estate and write-downs to reflect declines in the fair value of the properties
after acquisition are included in operating expenses.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Prior to
1997, no deferred taxes were recognized since the Company did not have a
sustained history of profits.
STOCK OPTIONS
The Company accounts for stock options under Accounting Principles Board
Option No. 25, Accounting for Stock Issued to Employees.
EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounts Standards
(SFAS) No. 128, Earnings per Share which changes the earnings per share
disclosures from primary and fully diluted per share amounts to basic and
diluted earnings per share. Under SFAS No. 128, basic earnings per
30
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
common share are determined by dividing net income by the weighted average
number of shares of common stock outstanding. Diluted earnings per share is
calculated including the average dilutive common stock equivalents outstanding
during the period. Earnings per share disclosures for prior periods have been
restated to conform to these new calculation methods.
Dilutive common equivalent shares consist of stock options, calculated
using the treasury stock method. In loss periods, dilutive common equivalent
shares are excluded since the effect would be antidilutive.
Net income per common share is based on weighted average number of shares
outstanding of 1,691,301, 1,478,972 and 1,401,903 for the years ended 1997,
1996, and 1995 respectively.
RECLASSIFICATION
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 presentation.
NOTE 2. INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
==============================================================================================
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------
<S><C>
Held to maturity
U.S. Treasury securities $ 3,975,296 $ -- $83,466 $ 3,891,830
- ----------------------------------------------------------------------------------------------
Available for sale
U.S. Treasury securities $ 1,970,565 $ 3,435 $ -- $ 1,974,000
U.S. Government agency 12,964,401 27,088 349 12,991,140
Mortgage-backed securities 1,000,000 -- 20,000 980,000
Federal Home Loan Bank stock 292,900 -- -- 292,900
Federal Reserve stock 327,250 -- -- 327,250
- ----------------------------------------------------------------------------------------------
$16,555,116 $30,523 $20,349 $16,565,290
==============================================================================================
DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------
Held to maturity
U.S. Treasury securities $ 1,992,835 $ -- $ 7,210 $ 1,985,625
- ----------------------------------------------------------------------------------------------
Available for sale
U.S. Treasury securities $ 9,155,662 $ 2,211 $ 875 $ 9,156,998
U.S. Government agency 1,000,000 -- 3,750 996,250
Mortgage-backed securities 1,000,000 -- 13,125 986,875
Federal Reserve stock 194,150 -- -- 194,150
- ----------------------------------------------------------------------------------------------
$11,349,812 $ 2,211 $17,750 $11,334,273
==============================================================================================
</TABLE>
The amortized cost and market value of debt securities by contractual
maturities are shown below. Actual maturities of these securities may differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without call or repayment penalties.
31
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
<TABLE>
<CAPTION>
==============================================================================================
HELD TO MATURITY AVAILABLE FOR SALE
- ----------------------------------------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
DECEMBER 31, 1997 COST VALUE COST VALUE
- ----------------------------------------------------------------------------------------------
<S><C>
Due within one year $3,975,296 $3,891,830 $ 9,936,710 $ 9,942,937
Due after one through five years -- -- 4,998,256 5,022,203
Mortgage-backed securities -- -- 1,000,000 980,000
Equity securities -- -- 620,150 620,150
- ----------------------------------------------------------------------------------------------
$3,975,296 $3,891,830 $16,555,116 $16,565,290
==============================================================================================
DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------
Due within one year $ -- $ -- $10,155,662 $10,153,248
Due after one through five years 1,992,835 1,985,625 -- --
Mortgage-backed securities -- -- 1,000,000 986,875
Federal Reserve stock -- -- 194,150 194,150
- ----------------------------------------------------------------------------------------------
$1,992,835 $1,985,625 $11,349,812 $11,334,273
==============================================================================================
</TABLE>
Proceeds from available for sale securities during 1996 were $1,979,884
with realized gains of $304 on those sales.
Securities were sold to commercial customers of the Bank under agreements
for the Bank to repurchase the securities as follows:
<TABLE>
<CAPTION>
==============================================================================================
1997 1996
- ----------------------------------------------------------------------------------------------
<S><C>
Cost at December 31 $13,459,429 $6,367,028
Fair value at December 31 13,508,000 6,352,152
Repurchase price 13,305,780 6,344,959
Average balance during the year 10,570,086 7,761,702
Average interest rate during the year 2.98% 2.97%
Maximum month-end balance $14,666,790 $9,591,298
==============================================================================================
</TABLE>
NOTE 3. CASH AND EQUIVALENTS
Banks are required to carry cash reserves of specified percentages of
deposit balances. The Bank's normal balances of cash on hand and on deposit with
other banks are sufficient to satisfy these reserve requirements.
32
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
==============================================================================================
1997 1996
- ----------------------------------------------------------------------------------------------
<S><C>
Real estate
Commercial $20,447,677 $17,844,638
Residential 18,816,566 18,919,242
Commercial 30,860,360 30,801,220
Consumer 2,304,614 2,332,308
- ----------------------------------------------------------------------------------------------
72,429,217 69,897,408
==============================================================================================
Less
Unearned income 266,548 332,011
Allowance for loan losses 1,177,437 765,000
- ----------------------------------------------------------------------------------------------
1,443,985 1,097,011
- ----------------------------------------------------------------------------------------------
Loans, net $70,985,232 $68,800,397
==============================================================================================
</TABLE>
The maturity and rate repricing distribution of the loan portfolio is as
follows:
<TABLE>
<CAPTION>
==============================================================================================
1997 1996
- ----------------------------------------------------------------------------------------------
<S><C>
Repricing or maturing within one year $55,913,146 $61,862,644
Maturing over one to five years 14,618,447 6,927,761
Maturing over five years 1,897,624 1,107,003
- ----------------------------------------------------------------------------------------------
$72,429,217 $69,897,408
==============================================================================================
</TABLE>
Transactions in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
==============================================================================================
1997 1996
- ----------------------------------------------------------------------------------------------
<S><C>
Balance, beginning of year $ 765,000 $ 617,000
Provisions charged to operations 747,908 452,190
Recoveries 32,943 18,126
- ----------------------------------------------------------------------------------------------
1,545,851 1,087,316
Charge-offs 368,414 322,316
- ----------------------------------------------------------------------------------------------
Balance, end of year $1,177,437 $ 765,000
==============================================================================================
</TABLE>
The balance of nonaccrual and impaired loans is as follows:
<TABLE>
<CAPTION>
==============================================================================================
1997 1996
- ----------------------------------------------------------------------------------------------
<S><C>
Total guaranteed by the Small Business Administration $ 531,722 $1,076,000
Other nonaccrual loans 245,954 817,677
- ----------------------------------------------------------------------------------------------
Total nonaccrual loans 777,676 1,893,677
Average impaired loans 1,271,093 1,276,500
Related allowance for credit losses 171,923 183,000
Interest collected 98,000 56,000
Balance of accrued interest not recorded 73,864 78,000
==============================================================================================
</TABLE>
Loans which were 90 days or more past due amounted to $371,000 and $101,000 at
December 31, 1997, and 1996.
33
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
The Bank lends to customers located primarily in Annapolis, Baltimore, and
surrounding areas of central Maryland. Although the loan portfolio is
diversified, its performance will be influenced by the economy of the region.
Certain officers and directors (and companies which have a 10% or more
beneficial ownership) have loans with the Bank. Such loans were made in the
ordinary course of business on substantially the same terms as those prevailing
at the time for comparable transactions with unrelated parties and are being
repaid as agreed. A summary of the activity of these loans follows:
======================================================================
1997 1996
- ----------------------------------------------------------------------
Beginning balance $ 3,071,471 $2,153,082
Advances 1,058,813 1,764,445
Repayments (240,899) (846,056)
Change in officers and directors (1,659,796) --
- ----------------------------------------------------------------------
Ending balance $ 2,229,589 $3,071,471
======================================================================
NOTE 5. CREDIT COMMITMENTS
Outstanding loan commitments, unused lines of credit, and letters of
credit are as follows:
======================================================================
(in thousands) 1997 1996
- ----------------------------------------------------------------------
Loan commitments
Construction $ 4,319 $ 6,106
Other 10,800 8,656
- ----------------------------------------------------------------------
$15,119 $14,762
======================================================================
Letters of credit
Deposit secured $ 592 $ 746
Other 473 504
- ----------------------------------------------------------------------
$ 1,065 $ 1,250
======================================================================
Loan commitments and lines of credit are agreements to lend to a customer
as long as there is no violation of any condition to the contract. Loan
commitments generally have variable interest rates, fixed expiration dates, and
may require payment of a fee. Lines of credit generally have variable interest
rates. Such lines do not represent future cash requirements because it is
unlikely that all customers will draw upon their lines in full at any time.
Letters of credit are commitments issued to guarantee the performance of a
customer to a third party. Loan commitments and lines and letters of credit are
made on the same terms, including collateral, as outstanding loans. No amount
has been recognized by the Bank as an allowance for losses related to these
financial instruments with off-balance sheet risk.
NOTE 6. INTANGIBLE ASSETS
In 1997 the intangible assets acquired in 1990 were evaluated for
impairment. Except for the core deposit premium, the various other intangible
assets were written off as part of the restructuring expense. The core deposit
premium is being amortized over a period expiring in the year 2000. Amortization
expense relating to the core deposit premium was $87,527 in each of the three
years ended December 31, 1997.
34
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTE 7. PREMISES AND EQUIPMENT
A summary of premises and equipment and the related depreciation is as
follows:
=====================================================================
1997 1996
- ---------------------------------------------------------------------
Leasehold improvements $ 658,175 $ 805,067
Furniture, fixtures, and equipment 1,077,546 1,046,101
- ---------------------------------------------------------------------
1,735,721 1,851,168
Accumulated depreciation 496,834 516,343
- ---------------------------------------------------------------------
Net premises and equipment $1,238,887 $1,334,825
=====================================================================
Depreciation and amortization expense $ 197,955 $ 187,311
=====================================================================
NOTE 8. LEASE COMMITMENTS
The Company leases facilities under the following terms:
<TABLE>
<CAPTION>
==============================================================================================
CURRENT
ANNUAL
RENTAL EXPIRATION DATE RENEWAL OPTIONS
- ----------------------------------------------------------------------------------------------
<S><C>
Bestgate Branch $ 96,286 January, 1999 None
Cape St. Claire Branch 13,200 February, 1999 3 terms of 5 years
Edgewater Branch 40,000 April, 2005 2 terms of 10 years
Kent Island Branch 18,000 August, 1998 1 year, 2 year terms
Severna Park Branch 40,354 August, 2006 1 term of 10 years
Administrative offices, Annapolis 131,800 September, 2005 None, early buyout 2000
==============================================================================================
</TABLE>
Some of the leases provide for increases in the rental rates at specified
times during the lease terms, prior to the expiration dates. All renewal options
are exercisable at increased rates.
Lease obligations will require rent payments as follows:
================================================================================
PERIOD MINIMUM RENTALS
- --------------------------------------------------------------------------------
1998 $ 336,282
1999 223,968
2000 205,502
2001 85,354
2002 85,354
Remaining years 1,186,472
- --------------------------------------------------------------------------------
$2,122,932
================================================================================
The leases generally provide for payment of property taxes, insurance, and
maintenance costs by the Company. The total rental expense for all real property
leases was $463,900, $402,105, and $429,927 for 1997, 1996, and 1995,
respectively.
35
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
NOTE 9. DEPOSITS
Major classifications of deposits are as follows:
===============================================================================
1997 1996
- -------------------------------------------------------------------------------
Demand, non-interest bearing $10,330,153 $10,051,957
NOW accounts 19,272,587 20,759,310
Savings and money market 24,730,257 27,618,623
Time deposits, $100,000 and over 5,897,484 3,617,185
Other time 35,831,281 25,058,920
- -------------------------------------------------------------------------------
$96,061,762 $87,105,995
===============================================================================
Time deposits, shown in thousands, mature as follows:
- -------------------------------------------------------------------------------
Three months or less $10,307 $ 12,687
Four months to one year 28,128 13,884
Over one year 3,294 2,105
- -------------------------------------------------------------------------------
$ 41,729 $ 28,676
===============================================================================
At December 31, 1997, time deposits with maturities in excess of five
years totaled $127,064.
NOTE 10. DUE TO STOCKHOLDER
In June 1990, the Company borrowed $3,000,000 under an unsecured
promissory note to a stockholder of the Company to provide sufficient regulatory
capital to allow the Company to purchase and assume Gibraltar's assets and
liabilities. Interest accrued, but not paid, on the note was at an annual rate
equal to the Bank's prime rate less 2%. In December 1989, this same stockholder
advanced funds to the Company to provide sufficient funds to start banking
operations in January 1990.
The stockholder acquired 907,143 shares of stock for $3,175,000 due him in
a stock offering which terminated in January 1995. The Company issued a new note
for $848,400 for the remaining amount owed the stockholder. Interest accrued on
the note at an annual rate of the prime rate published in the Wall Street
Journal plus 1%. The principal and interest, totaling $1,062,836, on the note
were paid off in 1997. Interest expensed under this note was $59,574, $78,759,
and $95,546 for 1997, 1996, and 1995, respectively.
NOTE 11. PROFIT SHARING PLAN
The company has a profit sharing plan, qualifying under Section 401(k) of
the Internal Revenue Code, for those employees who meet the eligibility
requirements set forth in the plan. The plan does not require the company to
match the participants' contributions. The Company contributions to the plan
were $25,874 in 1997, $19,596 in 1996, and $15,000 in 1995.
NOTE 12. LINES OF CREDIT
The Bank is a member of Federal Home Loan Bank system and may borrow up to
$5,000,000. If funded, this line is secured by one to four family residential
mortgage loans held in the Bank's portfolio. In addition, the Bank has
available secured lines of credit of $5,000,000 from other banks.
36
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTE 13. STOCK OPTIONS
The Corporation has adopted a stock option plan, covering 100,000 shares
of common stock, intended to qualify as incentive stock options under Section
422 of the Internal Revenue Code. The plan provides for granting options to
purchase shares of the common stock to the officers and other key employees of
the Corporation and the Bank. Options granted have ten year expiration dates
with vesting periods from immediate to five years. No options shall be granted
under the plan after March 28, 2007.
A summary of the status of the Company's performance-based stock option
plans follows:
==============================================================================
1997
- ------------------------------------------------------------------------------
Outstanding, beginning of year --
Granted 64,000
Exercised --
Forfeited (6,500)
- ------------------------------------------------------------------------------
Outstanding, end of year 57,500
==============================================================================
These options expire as follows:
==============================================================================
EXERCISE
PRICE OPTIONS
- ------------------------------------------------------------------------------
July, 2007 $6.00 30,000
September, 2007 $6.00 1,000
November, 2007 $9.88 6,500
December, 2007 $9.75 10,000
- ------------------------------------------------------------------------------
Total nonvested 47,500
- ------------------------------------------------------------------------------
April, 2007 (100% vested) $5.00 10,000
- ------------------------------------------------------------------------------
57,500
==============================================================================
The Company applies APB No. 25 in accounting for the stock option plan.
Accordingly, no compensation expense has been recognized for the stock options
granted. Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123) was issued in October, 1995 to establish
accounting and reporting standards for stock-based employee compensation plans.
SFAS No. 123 defines a fair value based method of accounting for measuring
compensation expense for stock-based plans to be recognized in the statement of
income or disclosed in the notes to the financial statements.
The weighted average fair value of options granted during 1997 has been
estimated using the Black-Scholes option-pricing model with the following
assumptions:
Dividend yield 0.00%
Risk-free interest rate 5.75%
Expected volatility 10.00%
Expected life in years 10
37
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
Had compensation been determined in accordance with the provisions of SFAS
No. 123, the Company's net income and earning per share would have been reduced
to the following pro forma amounts:
===================================================================
1997
- -------------------------------------------------------------------
Net income
As reported $1,084,197
Pro forma $ 943,715
Basic earnings per share
As reported $ 0.64
Pro forma $ 0.58
Diluted earnings per share
As reported $ 0.63
Pro forma $ 0.57
===================================================================
NOTE 14. CAPITAL STANDARDS
The Federal Reserve Board and the Federal Deposit Insurance Corporation
have adopted risk-based capital standards for banking organizations. These
standards require ratios of capital to assets for minimum capital adequacy and
to be classified as well capitalized under prompt corrective action provisions.
The capital ratios, and minimum capital requirements of the Bank, as of December
31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
=============================================================================================
TO BE WELL
ACTUAL CAPITAL ADEQUACY CAPITALIZED
- ---------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------
<S><C>
Total capital
(to risk-weighted assets) $11,393,091 15.8% > $5,772,738 > 8.0% > $7,215,923 > 10.0%
- - - -
Tier 1 capital
(to risk-weighted assets) $10,490,371 14.5% > $2,886,369 > 4.0% > $4,329,554 > 6.0%
- - - -
Tier 1 capital
(to average assets) $10,490,371 8.8% > $4,767,360 > 4.0% > $5,959,200 > 5.0%
- - - -
<CAPTION>
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------
<S><C>
Total capital
(to risk-weighted assets) $ 6,445,903 10.2% > $5,035,177 > 8.0% > $6,293,972 > 10.0%
- - - -
Tier 1 capital
(to risk-weighted assets) $ 5,680,903 9.0% > $2,517,589 > 4.0% > $3,776,383 > 6.0%
- - - -
Tier 1 capital
(to average assets) $ 5,680,903 5.8% > $3,898,339 > 4.0% > $4,879,324 > 5.0%
- - - -
=============================================================================================
</TABLE>
Tier 1 capital consists of capital stock, surplus, and undivided profits
and total capital includes a limited amount of the allowance for credit losses.
In calculating risk-weighted assets, specified risk percentages are applied to
each category of asset and off-balance sheet items.
Failure to meet the capital requirements could affect the Bank's ability
to pay dividends and accept deposits and may significantly affect the operations
of the Bank.
38
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTE 15. INCOME TAXES
The components of the deferred tax benefit are as follows:
<TABLE>
<CAPTION>
==============================================================================================
1997
- ----------------------------------------------------------------------------------------------
<S><C>
Recognition of the benefit of the net operating loss carryover $ 449,614
Provision for credit losses (101,996)
Revenues taxed not earned (9,770)
Expenses incurred not deducted 65,000
Depreciation expense 34,878
Amortization and write down of intangible assets (84,053)
Elimination of the valuation allowance (1,123,000)
Deferred tax benefit $ (769,327)
==============================================================================================
</TABLE>
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
==============================================================================================
1997 1996
- ----------------------------------------------------------------------------------------------
<S><C>
Deferred tax assets
Allowance for credit losses $286,996 $ 185,000
Revenue taxed not earned 100,770 91,000
Expenses incurred not deducted -- 65,000
Net operating loss carryforward 492,386 942,000
- ----------------------------------------------------------------------------------------------
Total deferred tax assets 880,152 1,283,000
- ----------------------------------------------------------------------------------------------
Deferred tax liabilities
Depreciation 37,278 2,400
Intangible assets 73,547 157,600
Unrealized gain on securities available for sale 3,459 --
- ----------------------------------------------------------------------------------------------
Total deferred tax liabilities 114,284 160,000
- ----------------------------------------------------------------------------------------------
Valuation allowance -- (1,123,000)
- ----------------------------------------------------------------------------------------------
Net deferred tax asset $765,868 $ --
==============================================================================================
</TABLE>
The differences between the amount of federal income taxes at 34% and the
amount reported by the Company follow:
<TABLE>
<CAPTION>
==============================================================================================
1997 1996
- ----------------------------------------------------------------------------------------------
<S><C>
Income before income taxes $ 314,870 $ 422,540
Taxes computed at the federal income tax rate 107,056 143,664
Increases (decreases) resulting from
State income taxes, net of federal benefit 14,547 19,521
Nondeductible expenses 1,720 14,856
Net operating loss carryforward (892,650) (178,041)
- ----------------------------------------------------------------------------------------------
Income tax expense $(769,327) $ --
==============================================================================================
</TABLE>
The Company has approximately $1.4 million of net operating loss
carryforwards at December 31, 1997.
39
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
NOTE 16. PREFERRED STOCK
The Company is authorized to issue up to 2,000,000 shares of preferred
stock with a par value of $.01 per share.
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments are
summarized below. The fair values of a significant portion of these financial
instruments are estimates derived using present value techniques and may not be
indicative of the net realizable or liquidation values. Also, the calculation of
estimated fair values is based on market conditions at a specific point in time
and may not reflect current or future fair values.
<TABLE>
<CAPTION>
==============================================================================================
DECEMBER 31, 1997 CARRYING AMOUNT FAIR VALUE
- ----------------------------------------------------------------------------------------------
<S><C>
Financial assets
Cash and due from banks $ 5,611,407 $ 5,611,407
Federal funds sold 20,743,973 20,743,973
Investment securities (total) 20,540,586 20,457,120
Loans, net 70,985,232 70,793,572
Accrued interest receivable 515,549 515,549
Financial liabilities
Noninterest-bearing deposits $10,330,153 $10,330,153
Interest-bearing deposits 85,731,609 85,869,314
Securities sold under agreements to repurchase 13,305,780 13,305,780
Accrued interest payable 36,113 36,113
==============================================================================================
</TABLE>
The fair values of U.S. Treasury and Government agency securities are
determined using market quotations.
The fair value of fixed-rate loans is estimated to be the present value of
scheduled payments discounted using interest rates currently in effect for loans
of the same class and term. The fair value of variable-rate loans, including
loans with a demand feature, is estimated to equal the carrying amount. The
valuation of loans is adjusted for possible credit losses.
The fair value of interest-bearing checking, savings, and money market
deposit accounts is equal to the carrying amount. The fair value of
fixed-maturity time deposits is estimated based on interest rates currently
offered for deposits of similar remaining maturities.
The fair value of long-term debt is estimated based on interest rates
currently offered for long-term debt of similar terms.
It is not practicable to estimate the fair value of outstanding loan
commitments, unused lines, and letters of credit.
In 1996, the Company considered disclosure of the fair value of its
financial instruments, including off-balance sheet items and determined that the
difference between its assets and liabilities and their carrying values was
insignificant. The Company reached this conclusion after evaluating the
repricing and terms of its financial instruments. A substantial portion of such
instruments repriced annually and were short term in nature. As a result, the
fair values approximated the value reported in the financial statements at
December 31, 1996.
40
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTE 18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
==============================================================================================
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------
THREE MONTHS ENDED
- ----------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------------------------------------------------------
<S><C>
1997
Interest revenue $2,492 $2,422 $2,260 $1,987
Interest expense 976 1,008 893 754
Net interest income 1,516 1,414 1,367 1,233
Provision for loan losses 354 75 82 237
Net income 92 335 274 383
Earnings per share-basic 0.04 0.23 0.19 0.26
Earnings per share-diluted 0.04 0.23 0.19 0.26
==============================================================================================
</TABLE>
NOTE 19. PARENT COMPANY FINANCIAL INFORMATION
The balance sheet and statements of income and cash flows for Annapolis
National Bancorp, Inc. (Parent Company only) follow:
BALANCE SHEETS
<TABLE>
<CAPTION>
==============================================================================================
DECEMBER 31, 1997 1996
- ----------------------------------------------------------------------------------------------
<S><C>
ASSETS
Cash and due from banks $ 191 $ 20,765
Investment in Annapolis National Bank 10,713,401 6,453,665
Deferred income taxes 373,722 --
- ----------------------------------------------------------------------------------------------
Total assets $11,087,314 $ 6,474,430
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to stockholder $ -- $ 1,003,661
- ----------------------------------------------------------------------------------------------
Stockholders' equity
Common stock, par value $.01 per share; authorized
10,000,000 shares; issued and outstanding 2,312,306
shares in 1997 and 1,478,972 shares in 1996 23,123 14,789
Capital surplus 13,135,320 8,633,560
Retained earnings (deficit) (2,077,844) (3,162,041)
Unrealized gain (loss) on investment securities available for sale 6,715 (15,539)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 11,087,314 5,470,769
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $11,087,314 $ 6,474,430
==============================================================================================
</TABLE>
41
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
==============================================================================================
YEARS ENDED DECEMBER 31, 1997 1996
- ----------------------------------------------------------------------------------------------
<S><C>
Interest revenue $ 8,257 $ --
Interest expense 59,575 78,759
- ----------------------------------------------------------------------------------------------
Net interest income (expense) (51,318) (78,759)
Equity in undistributed income of subsidiary 761,893 501,399
Expenses
Other operating 100 100
- ----------------------------------------------------------------------------------------------
Income before income taxes 710,475 422,540
Income taxes (373,722) --
- ----------------------------------------------------------------------------------------------
Net income $1,084,197 $ 422,540
==============================================================================================
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
==============================================================================================
YEARS ENDED DECEMBER 31, 1997 1996
- ----------------------------------------------------------------------------------------------
<S><C>
Cash flows from operating activities
Interest received $ 8,257 $ --
Interest paid (214,836) (19,044)
Cash paid for operating expenses (100) (100)
- ----------------------------------------------------------------------------------------------
(206,679) (19,144)
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital contributed to Annapolis National Bank (3,475,589) --
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from stock offering 4,510,094 --
Repayment of stockholder loan (848,400) --
- ----------------------------------------------------------------------------------------------
3,661,694 --
- ----------------------------------------------------------------------------------------------
Net (decrease) in cash (20,574) (19,144)
Cash and equivalents at beginning of year 20,765 39,909
- ----------------------------------------------------------------------------------------------
Cash and equivalents at end of year $191 $ 20,765
- ----------------------------------------------------------------------------------------------
Reconciliation of net income to net cash
provided by operating activities
Net income $ 1,084,197 $422,540
Adjustments to reconcile net income to net
cash used in operating activities
Undistributed net income of subsidiary (761,893) (501,399)
Increase in deferred tax assets (373,722) --
Increase (decrease) in accrued interest expense (155,261) 59,715
- ----------------------------------------------------------------------------------------------
(206,679) $(19,144)
==============================================================================================
</TABLE>
42
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
OFFICERS AND DIRECTORS
[PHOTO APPEARS HERE]
Seated Ronald E. Gardner, John W. Marhefka Jr., Standing (left to right)
Lawrence W. Schwartz, Stanley H. Katsef, Richard M. Lerner, Stanley J. Klos Jr.,
Dimitri P. Mallios, Albert Phillips and Lawrence E. Lerner.
BOARD OF DIRECTORS EXECUTIVE OFFICERS
OF ANNAPOLIS NATIONAL OF ANNAPOLIS NATIONAL
BANCORP, INC. AND BANCORP, INC.
ANNAPOLIS NATIONAL
BANK Russell J. Grimes Jr.
Chief Financial Officer &
Ronald E. Gardner Treasurer
Stanley H. Katsef John W. Marhefka Jr.
Vice Chairman of the Board Chief Executive Officer &
Stanley J. Klos Jr. Vice President
Lawrence E. Lerner Lori J. Mueller
Richard M. Lerner Secretary
Dimitri P. Mallios Albert Phillips
John W. Marhefka Jr. President
Chief Executive Officer
Albert Phillips
Chairman of the Board
Lawrence W. Schwartz
OFFICERS OF ANNAPOLIS
NATIONAL BANK
EXECUTIVE OFFICERS
Jeffrey S. Armiger
Senior Vice President,
Business Banking
Kevin J. Barron
Senior Vice President,
Real Estate Lending
Russell J. Grimes Jr.
Senior Vice President,
Chief Financial Officer & Treasurer
Michael L. Irwin, CPA
Senior Vice President,
Credit Administration
John W. Marhefka Jr.
President &
Chief Executive Officer
Lori J. Mueller
Senior Vice President,
Administration & Marketing
VICE PRESIDENTS
Tianne Baker
Real Estate Lending
Tamara S. Cleaver
Loan Servicing
Stephanie L. Gates
Real Estate Lending
Becky L. Hoffman
Operations
Robert E. Mann
Commercial Lending
Jo Ann Pyles
Mortgage Bandking
Jan L. Rupp
Real Estate Lending
ASSISTANT VICE PRESIDENTS
Judith A. Atkins
Construction Loan Adninistration
Deborah L. Cobb
Relationship Manager
Linda W. Friday
Relationship Manager
Alison M. Hamlett
Commercial Lending
Janice A. Korvin
Accounting Manager
Susan F. Smith
Relationship Manager
Heather R. Tinelli
Credit Analyst
L. C. "Sam" Walters
Relationship Manager
Gregory E. Williams
Commercial Lending
43
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
CORPORATE INFORMATION
EXECUTIVE OFFICES
180 Admiral Cochrane Drive
Suite 300
Annapolis, Maryland 21401
410-224-4455
COMMUNITY OFFICES
ANNAPOLIS
900 Bestgate Road
Suite 100
Annapolis, Maryland 21401
410-224-4483
CAPE ST. CLAIRE
1372-B Cape St. Claire Road
Annapolis, Maryland 21401
410-974-1515
EDGEWATER
120 Central Avenue
Edgewater, Maryland 21037
410-956-2900
KENT ISLAND
Route 50 and 18
Kent Island Shopping Center
Stevensville, Maryland 21666
410-643-4191
SEVERNA PARK
50 West McKinsey Road
Severna Park, Maryland 21146
410-518-6885
ADDRESS OF PRINCIPAL OFFICE
Annapolis National Bancorp, Inc.
180 Admiral Cochrane Dr.,
Suite 300
Annapolis, Maryland 21401
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
INDEPENDENT AUDIT
FIRM
Rowles & Company, LLP
101 East Chesapeake Avenue
Baltimore, MD 21286
SECURITIES COUNSEL
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
ANNUAL MEETING
The Annual Meeting of the
stockholders of Annapolis
National Bancorp, Inc. will be
held at the Annapolis Holiday
Inn, 210 Holiday Ct., Annapolis,
MD 21401 at 6:00 PM on
Thursday, April 23, 1998.
INVESTOR INFORMATION
Analysts, stockholders and others
seeking information about
Annapolis National Bancorp, Inc.
are invited to contact:
John W. Marhefka Jr.
Chief Executive Officer
or
Russell J. Grimes Jr.
Chief Financial Officer & Treasurer
Annapolis National Bancorp, Inc.
180 Admiral Cochrane Drive
Suite 300
Annapolis, Md. 21401
(410) 224-4455
SECURITIES LISTING
The Company's shares are
listed on The NASDAQ Stock
Market(SM). Ticker Symbol:
ANNB
Member Federal Deposit Insurance Corporation
Member Federal Reserve System
44
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The Form 10-KSB is qualified in its entirety by reference to
such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,611
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 20,744
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,565
<INVESTMENTS-CARRYING> 1,000
<INVESTMENTS-MARKET> 3,892
<LOANS> 70,985
<ALLOWANCE> 1,177
<TOTAL-ASSETS> 120,827
<DEPOSITS> 96,062
<SHORT-TERM> 13,306
<LIABILITIES-OTHER> 372
<LONG-TERM> 0
0
0
<COMMON> 23
<OTHER-SE> 11,064
<TOTAL-LIABILITIES-AND-EQUITY> 120,827
<INTEREST-LOAN> 7,448
<INTEREST-INVEST> 937
<INTEREST-OTHER> 776
<INTEREST-TOTAL> 9,161
<INTEREST-DEPOSIT> 3,571
<INTEREST-EXPENSE> 3,631
<INTEREST-INCOME-NET> 5,531
<LOAN-LOSSES> 748
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,230
<INCOME-PRETAX> 315
<INCOME-PRE-EXTRAORDINARY> 315
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,084
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.63
<YIELD-ACTUAL> 8.89
<LOANS-NON> 778
<LOANS-PAST> 371
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,136
<ALLOWANCE-OPEN> 765
<CHARGE-OFFS> 368
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 1,177
<ALLOWANCE-DOMESTIC> 1,177
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 764
</TABLE>
Exhibit 99
[INSERT LOGO]
180 Admiral Cochrane Drive, Suite 300
Annapolis, Maryland 21401
(410) 224-4455
March 20, 1998
Dear Shareholder:
You are cordially invited and encouraged to attend the Annual Meeting of
Shareholders (the "Annual Meeting") of Annapolis National Bancorp, Inc. (the
"Company"), the holding company for Annapolis National Bank (the "Bank"), which
will be held on April 23, 1998, at 6:00 p.m., Eastern Daylight Savings Time, at
the Annapolis Holiday Inn, 210 Holiday Court, Annapolis, Maryland 21401.
Cocktails and hors d'oeuvres will be served.
The attached Notice of the Annual Meeting and the Proxy Statement describe
the formal business to be transacted at the Annual Meeting. Directors and
officers of Annapolis National Bancorp, Inc., as well as a representative of
Rowles & Company, LLP, the Company's independent auditors, will be present at
the Annual Meeting to discuss the Company and the Bank and respond to any
questions that our shareholders may have.
The Board of Directors of Annapolis National Bancorp, Inc. has determined
that the matters to be considered at the Annual Meeting are in the best
interests of the Company and its shareholders. FOR THE REASONS SET FORTH IN THE
PROXY STATEMENT, THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" EACH
MATTER CONSIDERED.
PLEASE SIGN AND RETURN THE ENCLOSED PROXY CARD PROMPTLY. YOUR COOPERATION
IS APPRECIATED SINCE A MAJORITY OF THE COMPANY'S COMMON STOCK MUST BE
REPRESENTED, EITHER IN PERSON OR BY PROXY, TO CONSTITUTE A QUORUM FOR THE
CONDUCT OF BUSINESS.
On behalf of the Board of Directors and all of the employees of the Company
and the Bank, I thank you for your continued interest and support.
Sincerely yours,
/s/ John W. Marhefka, Jr.
- --------------------------
John W. Marhefka, Jr.
Chief Executive Officer
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
---------------------------
NOTICE OF 1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 23, 1998
---------------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Annapolis
National Bancorp, Inc. ("Company") will be held on April 23, 1998, at 6:00 p.m:
local time, at the Annapolis Holiday Inn, 210 Holiday Court, Annapolis, Maryland
21401, for the following purposes:
(1) To elect four directors.
(2) To approve the selection of Rowles & Company, LLP as independent
auditors for the fiscal year ending December 31, 1998; and
(3) To transact any other business that may properly come before the
meeting, and any adjournments thereof, including whether or not to adjourn the
meeting.
Only those holders of record of Common Stock as of the close of business on
March 12, 1998, (the "Record Date") are entitled to notice of and to vote at the
1998 Annual Meeting of Stockholders and any adjournments or postponements
thereof.
Please sign, date and mail the accompanying proxy in the enclosed,
self-addressed, stamped envelope, whether or not you expect to attend the
meeting in person. You may withdraw your proxy at the meeting should you be
present and desire to vote your shares in person. All shareholders are cordially
invited to attend.
By Order of the Board of Directors
/s/ Lori J. Mueller
---------------------
LORI J. MUELLER
Secretary
Annapolis, Maryland
March 20, 1998
<PAGE>
ANNAPOLIS NATIONAL BANCORP, INC.
---------------------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 23, 1998
---------------------------
SOLICITATION AND VOTING OF PROXIES
This Proxy Statement is being mailed on or about March 20, 1998, to the
stockholders of Annapolis National Bancorp, Inc. (the "Company") in connection
with the solicitation by the Board of Directors of proxies to be used at the
Annual Meeting of Stockholders to be held on April 23, 1998, at 6:00 p.m. local
time, and at any adjournments or postponements thereof, at the Annapolis Holdiay
Inn, 210 Holiday Court, Annapolis, Maryland 21401.
Regardless of the number of shares of common stock owned, it is important
that record holders of a majority of the shares be represented by proxy or in
person at the Annual Meeting. Shareholders are requested to vote by completing
the enclosed proxy card and returning it signed and dated in the enclosed
postage-paid envelope. Shareholders are urged to indicate their vote in the
spaces provided on the proxy card. PROXIES SOLICITED BY THE BOARD OF DIRECTORS
OF THE COMPANY WILL BE VOTED IN ACCORDANCE WITH THE DIRECTIONS GIVEN THEREIN.
WHERE NO INSTRUCTIONS ARE INDICATED, SIGNED PROXY CARDS WILL BE VOTED FOR THE
APPROVAL AND RATIFICATION OF THE SPECIFIC PROPOSALS PRESENTED IN THIS PROXY
STATEMENT.
Other than the matters listed on the attached Notice of Annual Meeting of
Shareholders, the Board of Directors knows of no additional matters that will be
presented for consideration at the Annual Meeting. EXECUTION OF A PROXY,
HOWEVER, CONFERS ON THE DESIGNATED PROXY HOLDERS DISCRETIONARY AUTHORITY TO VOTE
THE SHARES IN ACCORDANCE WITH THEIR BEST JUDGMENT ON SUCH OTHER BUSINESS, IF
ANY, THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING AND AT ANY ADJOURNMENTS
THEREOF, INCLUDING WHETHER OR NOT TO ADJOURN THE ANNUAL MEETING.
A proxy may be revoked at any time prior to its exercise by filing a
written notice of revocation with the Corporate Secretary of the Company, by
delivering to the Company a duly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person. However, if you are a
shareholder whose shares are not registered in your own name, you will need
appropriate documentation from your record holder to vote personally at the
Annual Meeting.
The cost of solicitation of proxies on behalf of management will be borne
by Annapolis National Bank (the "Bank"). Proxies may be solicited personally or
by telephone by directors, officers and other employees of the Company and its
subsidiary, the Bank, without compensation therefor. The Company will also
request persons, firms and corporations holding shares in their names, or in the
name of their nominees, which are beneficially owned by others, to send proxy
material to and obtain proxies from such beneficial owners, and the Bank will
reimburse such holders for their reasonable expenses in doing so.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Stockholders are entitled to one vote for each share of common stock, par
value $.01 per share (the "Common Stock") registered in their names on the stock
transfer books of the Company at the close of business on March 12, 1998, the
record date fixed by the Board of Directors. At March 12, 1998, the Company had
outstanding 2,312,306 shares of Common Stock entitled to vote at the Annual
Meeting.
1
<PAGE>
As to the election of a director, the proxy card being provided by the
Board of Directors enables a shareholder to vote "FOR" the election of the
nominee proposed by the Board of Directors, or to "WITHHOLD" authority to vote
for the nominee being proposed. Under the Company's Bylaws, directors are
elected by a plurality of votes cast, without regard to either (i) broker
non-votes, or (ii) proxies as to which authority to vote for the nominee being
proposed is withheld.
As to the ratification of Rowles & Company, LLP as independent auditors of
the Company and all other matters that may properly come before the Annual
Meeting, by checking the appropriate box, you may: (i) vote "FOR" the item; (ii)
vote "AGAINST" the item; or (iii) "ABSTAIN" with respect to the item. Under the
Company's Bylaws, unless otherwise required by law, all such matters shall be
determined by a majority of the votes cast, without regard to either (i) broker
non-votes, or (ii) proxies marked "ABSTAIN" as to that matter.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Common Stock as of March 12, 1998, the Record Date, by each of the
Company's and Bank's directors and nominees and by each person known by the
Company to own beneficially more than 5% of the Company's voting securities, and
by the officers and directors of the Company as a group, including the number of
shares beneficially owned by, and percentage ownership of each such person as of
that date. Other than those persons listed below, the Company is not aware of
any person, as such term is defined in the Securities Exchange Act of 1934, as
amended, that owns more than 5% of the Company's Common Stock as of the Record
Date.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OWNED(1) CLASS
- ------------------------------------ --------------- ----------
<S> <C> <C>
Ronald E. Gardner.................................................................... 25,000 1.07%
1405 Goldenrain Drive
Crofton, Md. 21114
Stanley H. Katsef.................................................................... 29,150 1.25%
2703 Coriander Place
Edgewater, Md. 21037
Stanley J. Klos, Jr.................................................................. 20,000 0.86%
76 Chautaugua Road
Arnold, Md. 21012
Lawrence E. Lerner................................................................... 881,453 37.85%
2711 Washington Avenue
Chevy Chase, Md. 20815
Richard M. Lerner.................................................................... 100,000 4.29%
5447 Grove Ridge Way
Rockville, Md. 20852
Dimitri P. Mallios................................................................... 12,000 0.52%
3204 Ellicott Street, N.W.
Washington, D.C. 20008
John W. Marhefka, Jr. (2)............................................................ 74,290 3.19%
1905 White Heron Road
Annapolis, Md. 21401
Albert Phillips...................................................................... 18,500 0.79%
118 Riverside Drive
Cambridge, Md. 21613
Lawrence W. Schwartz................................................................. 18,566 0.80%
10854 Country Pond Lane
Oakton, Va. 22124
Officers and directors as a group (14)............................................... 1,189,292 51.07%
</TABLE>
2
<PAGE>
- ---------------
(1) Information relating to beneficial ownership of Common Stock is based upon
"beneficial ownership" concepts set forth in rules of the SEC under Section
13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Under these rules, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power" which includes the
power to vote or direct the voting of such security, or "investment power"
which includes the power to dispose or to direct the disposition of such
security. A person is deemed to be a beneficial owner of any security of
which that person has the right to acquire beneficial ownership within sixty
days. Under the rules, more than one person may be deemed to be a beneficial
owner of the same securities, and a person may be deemed to be a beneficial
owner of securities in which he has no beneficial interest. For instance,
beneficial ownership may include spouses, minor children and other relatives
residing in the same household, and trusts, partnerships, corporations, or
deferred compensation plans which are affiliated with the principal. Unless
otherwise indicated by footnote, each individual has sole voting and
dispositive powers to all shares indicated.
(2) Includes options to purchase 10,000 and 6,600 shares of Company Common Stock
which are currently exercisable at an exercise price of $5.00 per share and
$10.38 per share, respectively, and are deemed to be outstanding for the
purpose of computing the percentage of outstanding Common Stock beneficially
owned by all directors and executive officers as a group.
PROPOSALS TO BE VOTED ON AT THE MEETING
PROPOSAL 1. ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of nine (9)
directors. The Company's Articles of Incorporation provide that the Board of
Directors shall be divided into three classes, as nearly equal in number as the
then total number of directors constituting the entire board shall permit, with
directors of each class being elected for three-year terms at each Annual
Meeting. The terms of three directors of the Company will expire at the time of
the Annual Meeting of Stockholders. The positions of these three directors are
to be filled at the Annual Meeting of Stockholders. Therefore, three incumbent
directors have been nominated to be elected to hold office until the 2001 Annual
Meeting of Stockholders or until their respective successors are elected and
qualified or until their earlier resignation or removal. The nominees are
Stanley J. Klos, Jr., Richard M. Lerner and John W. Marhefka, Jr.
At a Board of Directors' meeting on April 25, 1997, pursuant to authority
contained under the Company's Articles of Incorporation and Bylaws, the
directors elected Stanley H. Katsef to the Board. Consistent with the laws of
the State of Maryland, Mr. Katsef will stand for election by the stockholders at
this Annual Meeting of Stockholders. Mr. Katsef has been nominated to be elected
and hold office as members of the class of directors whose terms are expected to
expire at the 2000 Annual Meeting of Stockholders or until his respective
successor is elected and qualified or until his earlier resignation or removal.
The proxies solicited hereby, unless directed to the contrary, will be
voted FOR the election as directors of all four nominees listed in the following
table. In order to be elected, a majority of the shares voted must be voted FOR
the election of each nominee. Each nominee has consented to serve as a director,
if elected. The Board of Directors has no reason to believe that any nominee
will be unwilling or unable to serve as a director but, if for any reason any
nominee is not willing or able to serve as a director, the accompanying proxy
will be voted FOR a substitute nominee chosen by the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE FOUR
NOMINEES NAMED IN THIS PROXY STATEMENT.
3
<PAGE>
INFORMATION CONCERNING NOMINEES
The following table sets forth information as of the Record Date concerning
persons nominated by the Board of Directors for election as directors of the
Company to serve until the 2001 Annual Meeting of Stockholders or until their
successors have been elected and qualified or until their earlier resignation or
removal. Except as indicated, the nominees have been officers of the
organizations named below or of affiliated organizations as their principal
occupations for more than five years.
NOMINEES
<TABLE>
<CAPTION>
NAME OF DIRECTORS AGE, PRINCIPAL OCCUPATION, POSITION WITH THE COMPANY AND THE BANK
- ----------------- ---------------------------------------------------------------------------
<S> <C>
Stanley J. Klos, Jr................. Mr. Klos, age 46, has been a practicing attorney in Anne Arundel and Prince
George's Counties since 1977. He is currently a principal of the Annapolis
law firm of Klos & Selle, P.A. He is a member of the Maryland, District of
Columbia, Anne Arundel County, and Prince George's County Bar Associations.
He has been a Director of the Company and the Bank since April 1997. Mr.
Klos is active in community affairs and serves on the Boards of Directors
of Leadership Anne Arundel, the American Heart Association Anne Arundel
County Chapter and the Anne Arundel County YMCA.
Richard M. Lerner................... Mr. Lerner, age 38, has been President of White Flint Builders, Inc. since
1984. White Flint Builders, Inc. is located in Bethesda, Maryland and is
engaged in high-end residential development and construction. He has been a
Director of the Company and the Bank since their inception. Richard Lerner
is the son of Lawrence E. Lerner, a Director of the Company and the Bank.
John W. Marhefka, Jr................ Mr. Marhefka, age 43, was appointed Chief Executive Officer and Vice
President of the Company and President and Chief Executive Officer of the
Bank on February 21, 1997. He has held high level positions in the Maryland
financial institution industry since 1978. Most recently, he was a founder
of Annapolis Bancshares, Inc. and Bank of Annapolis in 1988. As President
and Chief Executive Officer of those companies, he led them through more
than seven years of earnings and asset growth before they merged with Sandy
Spring Bancorp, Inc. in 1996. Mr. Marhefka also served as Chairman of the
Board of both companies from 1988 to 1992. He is active in community
affairs and serves on the Board of Directors of Leadership Anne Arundel.
</TABLE>
4
<PAGE>
The following table sets forth information as of the Record Date concerning
the person elected as a director of the Company by the Board of Directors
subsequent to the 1997 Annual Meeting of Stockholders. This person has been
nominated by the Board of Directors for election as members of the class of
directors of the Company whose terms are expected to expire at the 2000 Annual
Meeting of Stockholders or until their successors have been elected and
qualified or until their earlier resignation or removal.
<TABLE>
<CAPTION>
NAME OF NOMINEE AGE, PRINCIPAL OCCUPATION, POSITION WITH THE COMPANY AND THE BANK
- --------------- ---------------------------------------------------------------------------
<S> <C>
Stanley H. Katsef................... Mr. Katsef, age 53, became a Director and Vice Chairman of the Board of the
Company and the Bank in April 1997. He was previously a founding Director
of Annapolis Bancshares, Inc. and Bank of Annapolis in 1988, where he
served as Chairman of the Board and a full-time employee of both companies
from 1992 to 1996. Mr. Katsef was the owner of Katsef Sales, Inc., an
Annapolis based distributor of janitorial supply products until July 1,
1990.
</TABLE>
INFORMATION CONCERNING CONTINUING DIRECTORS
The following table sets forth information as of the Record Date concerning
directors of the Company whose terms of office will continue after the 1998
Annual Meeting of Stockholders. As indicated, some directors will serve until
the 1999 Annual Meeting of Stockholders, and other directors will serve until
the 2000 Annual Meeting of Stockholders. Except as indicated, the directors have
been officers of the organizations named below or of affiliated organizations as
their principal occupations for more than five years.
DIRECTORS SERVING UNTIL 1999
<TABLE>
<CAPTION>
NAME OF DIRECTORS AGE, PRINCIPAL OCCUPATION, POSITION WITH THE COMPANY AND THE BANK
- ----------------- ---------------------------------------------------------------------------
<S> <C>
Ronald E. Gardner................... Mr. Gardner, age 44, was an owner, Director and Vice President of E.L.
Gardner, Inc. from 1969 to 1996, at which time he sold his interest in the
company and resigned. He was responsible for day to day operations of E.L.
Gardner, Inc., which is a producer of ready mix concrete in Anne Arundel
County. He has been a Director of the Company and the Bank since April
1997. Mr. Gardner is also an Officer and Director of Arundel Management
Corporation located in Annapolis, Maryland, a real estate and management
company and President and principal owner of Washington Street Pub located
in Easton, Maryland.
Lawrence E. Lerner.................. Mr. Lerner, age 65 has been active in real estate development in the
Washington, D.C. metropolitan area for 30 years. He has been involved in
the development and construction of two regional shopping centers, several
other commercial developments, and more than 2,800 apartment units. Mr.
Lerner manages his real estate investments, comprised of various
partnership interests in entities which own real estate. He has been a
Director of the Company and the Bank since their inception. Mr. Lerner is
the father of Richard M. Lerner, a Director of the Company and Bank.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NAME OF DIRECTORS AGE, PRINCIPAL OCCUPATION, POSITION WITH THE COMPANY AND THE BANK
- ----------------- ---------------------------------------------------------------------------
<S> <C>
Lawrence W. Schwartz................ Mr. Schwartz, age 43, is a certified public accountant who has operated CPA
firms since 1984 and is currently Managing Partner of Schwartz, Albert &
Company, Chartered, a CPA firm based in Bethesda, Maryland. Additionally,
he was Executive Vice President and Chief Financial Officer of Federal
Supply Contracts Group, Inc., a reseller of furniture to the government,
from 1993 to 1995. Mr. Schwartz has been a Director of the Company since
April 1997 and a Director of the Bank since its inception.
</TABLE>
DIRECTORS SERVING UNTIL 2000
<TABLE>
<S> <C>
Dimitri P. Mallios.................. Mr. Mallios, age 65, is an attorney who has practiced law since 1960, and
is a member of the Bars of the State of Maryland and the District of
Columbia. He is presently a senior partner of the law firm of Margolius,
Mallios, Davis, Rider & Tomar, located in Washington, D.C. Mr. Mallios has
been a Director of the Company and the Bank since their inception.
Albert Phillips..................... Mr. Phillips, age 71, has been the Chairman of the Board of The Phillips
Corporation, a manufacturer and supplier of manufacturing technology
products headquartered in Columbia, Maryland since 1963. He has been a
Director of the Company and the Bank since their inception. Mr. Phillips
serves as Chairman of the Board of the Company and the Bank as well as
President of the Company.
</TABLE>
COMMITTEES
The Company and the Bank have standing Audit, Compensation, Executive,
Facilities and Nominating Committees of the Board of Directors. The members of
each of the named committees serve at the discretion of the Board of Directors.
The Audit Committee consists of Messrs. Gardner, Katsef, and Schwartz and
reviews and reports to the Board of Directors on examinations of the Bank and
its subsidiaries by regulatory authorities, recommends independent accountants
for appointment by the Boards of the Company and the Bank, reviews the scope of
the work of the independent accountants and their reports, and reviews the
activities and actions of the Bank's internal auditors. The Audit Committee met
one time during 1997.
The Compensation Committee, formed on April 25, 1997, consists of Messrs.
Gardner, Klos, R. Lerner and Mallios, and Mr. Marhefka as a non-voting member,
and reviews and determines salaries and other benefits for executive and senior
management of the Company and its subsidiaries, reviews and determines employees
to whom stock options are to be granted and the terms of such grants, and
reviews the selection of officers who participate in incentive and other
compensatory plans and arrangements. The Compensation Committee met three times
during 1997.
The Executive Committee consists of Messrs. Katsef, L. Lerner, R. Lerner,
Mallios, Marhefka, Phillips, Schwartz and Klos (alternate) and considers new
loan applications which are in excess of the limits granted by the Board of
Directors to the Officers Loan Committee. The Executive Committee met twenty
three (23) times during 1997.
The Facilities Committee, formed on November 20, 1997, consists of Messrs.
Gardner, Katsef, R. Lerner and Marhefka and advises the Board on matters
concerning branching, facilities, and relocations. The Facilities Committee did
not meet during 1997.
6
<PAGE>
The Nominating Committee, consisting of the full Board of Directors,
nominates persons for election to the Board of Directors of the Company and the
Bank. The Nominating Committee will consider shareholder recommendations
submitted to it in writing in care of the Company. The Nominating Committee met
one time during 1997.
DIRECTORS' COMPENSATION
The Board of Directors of the Company and the Bank held twelve (12)
meetings during 1997. All of the directors of the Company with the exception of
Director Lawrence E. Lerner attended at least 75% of the total number of the
board meetings held and committee meetings of which such director served during
1997. The Company pays no board or committee fees. Members of the Bank's
Executive Committee received a fee of $400 per month during 1997. The Bank paid
no other board or committee fees during 1997. Directors of the Bank began
receiving fees for each board and committee meeting attended in 1998 in the
amount of $200 per Board of Directors meeting, $150 per Executive Committee
meeting, and $100 per other committee meeting. Mr. Marhefka and Mr. Katsef,
receive no fees for attendance at board or committee meetings.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or allocated to the
Chief Executive Officer for services rendered to the Company and the Bank in all
capacities during the years ended December 31, 1995, 1996 and 1997. No other
executive officers of the Company or the Bank received total salary and bonus in
excess of $100,000 in 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------- ----------------------- -------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDERLYING OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
SALARY BONUS SATION AWARDS SARS PAYOUTS SATION
NAME YEAR ($) ($) ($)(3) ($) (#) ($) ($)
- --------------------------------- ----- -------- ------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John W. Marhefka, Jr. (1)........ 1997 $113,715 $16,979 $3,551 $ -- 16,600 $ -- $ --
Richard J. Morgan (2)............ 1997 72,302 -- -- -- -- -- 1,827(4)
1996 105,000 -- -- -- -- -- 2,307(4)
1995 93,720 30,000 -- -- -- -- --
</TABLE>
- ---------------
(1) Mr. Marhefka became Chief Executive Officer and Vice President of the
Company and President and Chief Executive Officer of the Bank on February
21, 1997.
(2) Mr. Morgan resigned from his position of Chief Executive Officer and Vice
President of the Company and President and Chief Executive Officer of the
Bank effective February 20, 1997.
(3) Represents the personal use of a Company automobile.
(4) Represents amounts contributed to Mr. Morgan by the Bank's 401(k) Plan for
1997 and 1996.
For 1997, 1996 and 1995, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the years; (b)
payments of above market preferential earnings on deferred compensation; (c)
payments of earnings with respect to long term incentive plans prior to
settlement or maturation; (d) tax payment reimbursements; or (e)
preferential discounts in stock.
7
<PAGE>
EMPLOYMENT AGREEMENT
On February 21, 1997, the Bank and Mr. Marhefka entered into a five year
employment agreement (the "Employment Agreement"). Pursuant to the Employment
Agreement, Mr. Marhefka receives a base salary of $132,500 per year, and such
base salary increases on each anniversary of the Employment Agreement by an
amount determined by multiplying the then base salary by the annual percentage
increase of the most recently released Consumer Price Index for Urban Consumers.
Additionally, the Bank provides and maintains an automobile for Mr. Marhefka's
use.
Pursuant to the Employment Agreement, on April 25, 1997, Mr. Marhefka was
granted incentive stock options to purchase 10,000 shares of Company Common
Stock at an exercise price of $5.00 per share. In addition, Mr. Marhefka will
have an opportunity to be granted additional options at the close of each
calendar year during the term of the Employment Agreement (the "Annual
Options"). The exercise price of the Annual Options will be granted at not less
than the fair market value of the Company's Common Stock at the close of the
calendar year and the number of Annual Options will be determined as a function
of the Company's return on average equity ("ROE") for the calendar year. Should
the Company's ROE for the calendar year be calculated greater than the specified
target, the amount of Annual Options to be granted will be 1,000 plus 10
additional options for each 0.01% by which the Company's ROE exceeds the
specified target for that calendar year.
Pursuant to the Employment Agreement, the Bank may pay a bonus to Mr.
Marhefka following the close of each calendar year during the term of the
Employment Agreement (the "Annual Bonus"). The amount of each Annual Bonus will
be calculated as 5% of the amount by which the Company's ROE exceeds the
specified target during that calendar year.
No Annual Options or Annual Bonus will be paid for any calendar year in
which (i) the Company's ROE is less than the specified target during that year,
or (ii) the amount of the Bank's non-performing assets, as defined in the
Employment Agreement, exceeds 0.75% of its total assets at the end of the
calendar year just completed, or (iii) the amount of the Bank's allowance for
loan losses is less than 150% of its non-accrual loans after deducting any
portion thereof which are government guaranteed.
Pursuant to the Employment Agreement, the Bank has reimbursed State Capital
Bancorp, Inc. $50,000 in expenses related to a public offering of State Capital
Bancorp, Inc. which was abandoned by Mr. Marhefka in order to accept employment
with the Bank. Mr. Marhefka was the sole stockholder of State Capital Bancorp,
Inc.
The Employment Agreement may be terminated by either party with or without
"cause". The Employment Agreement provides that, except in certain
circumstances, if Mr. Marhefka terminates the Employment Agreement by voluntary
resignation, or his employment is terminated without cause, Mr. Marhefka will
not, without the Bank's written consent, participate or be connected with any
competing institution that has offices or does business in Anne Arundel County,
Maryland for the remaining term of the Employment Agreement, not to exceed one
year in the case of resignation, or eight months if employment is terminated
without cause. The Employment Agreement further provides that if the Bank
terminates the Employment Agreement for any reason, other than for "cause" or
due to Mr. Marhefka's death, disability or resignation, Mr. Marhefka will be
paid an amount equal to his base salary for the twelve months immediately
preceding termination of the Employment Agreement. Notwithstanding the above, in
the event of a "change in control" of the Companies (as defined in the
Employment Agreement), Mr. Marhefka will have the option within six months of
the "change in control" to continue under the terms of the Employment Agreement
with the consent of the Bank, enter into a new employment agreement with the
Bank, on mutually agreeable terms, or receive a payment equal to one and
one-half (1.5) times the base salary and bonus earned during the preceding
twelve month period. The Employment Agreement does not provide benefits to Mr.
Marhefka in the event of his death or disability, his discharge by the Companies
for "cause," or his resignation.
8
<PAGE>
STOCK OPTION PLAN
The Company maintains an Employee Stock Option Plan (the "Option Plan") as
an inducement to attract, retain, and motivate qualified officers. The option
plan provides for discretionary awards of up to an aggregate of 100,000 options
to purchase Company Common Stock to officers and key employees of the Bank as
determined by a committee of disinterested directors at the fair market value of
the Common Stock on the date of grant. The Option Plan is not qualified under
Section 401(a) of the Internal Revenue Code and is not subject to any provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
The Option Plan was approved by the Company's stockholders on April 25, 1997,
therefore, no grants were made in 1996. During 1997 the Company granted Mr.
Marhefka options to purchase 10,000 shares and 6,600 shares of Company Common
Stock at an exercise price of $5.00 and $10.38 per share respectively.
Additionally, during 1997, the Company granted to other officers options to
purchase an aggregate of 54,000 shares of Company Common Stock at exercise
prices ranging from $6.00 to $9.88 per share. These options are subject to a
vesting schedule and will become exercisable in five equal annual installments
beginning one year from the date of grant. The Company intends to grant
additional options to certain key Bank employees in the future, however, the
timing and amount of such grants has yet to be determined. All such options will
be granted at not less than the fair market value of the Common Stock at the
time of the grant.
STOCK OPTION GRANTS
The following table lists all grants of options under the Stock Option Plan
to the Named Executive Officers for 1997.
OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTION/SARS EXERCISE
UNDERLYING GRANTED TO OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SH) DATE(1)
- ---- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
John W. Marhefka, Jr........................................ 10,000 14.2% $ 5.00 2/21/07
6,600 9.4% $10.38 12/31/07
</TABLE>
- ---------------
(1) The option term is 10 years.
STOCK OPTION EXERCISES AND HOLDINGS
There were no stock options exercised during 1997. The following table
reflects the number of shares covered by all remaining unexercised stock options
which were exercisable as of December 31, 1997. Also reported are the values for
"in-the-money" options which represent the difference between the exercise price
of any such remaining unexercised options and the year-end market price of the
Common Stock.
9
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END(#)(1) AT FY-END($)(2)
------------------------------------ ------------------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------------------ ------------------------------------
<S> <C> <C>
John W. Marhefka, Jr................ 16,600/0 $55,792/0
</TABLE>
- ---------------
(1) 10,000 options have an exercise price of $5.00 per share and 6,600 options
have an exercise price of $10.38 and are immediately exercisable. The
options will expire on February 21, 2007 and December 31, 2007 respectively,
ten (10) years from the date of grant.
(2) Based on market value of the underlying stock at fiscal year-end minus the
exercise price. The closing price of the Common Stock on December 31, 1997
was $10.50.
OTHER COMPENSATION PLANS
Executive officers participate in the Bank's qualified 401K retirement plan
on the same terms as non-executive employees who meet the applicable eligibility
criteria, subject to any legal limitations on the amounts that may be
contributed or the benefits that may be payable under these plans. In addition,
all full-time employees are covered as a group for comprehensive
hospitalization, including major medical, long-term disability and dismemberment
insurance and group term life insurance. Additionally, executive officers of the
Bank participate in incentive compensation plans based on the accomplishment of
specific performance goals as established by the Compensation Committee.
CERTAIN TRANSACTIONS WITH MANAGEMENT
The Bank grants loans to directors and officers in the normal course of
business. The Bank has adopted a policy which requires that all loans or
extensions of credit to executive officers and directors must be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with the general public and
must not involve more than the normal risk of repayment or present other
unfavorable features.
In June 1990, Mr. Lawrence E. Lerner, a director of the Company and Bank,
made a $3.2 million unsecured loan to the Company which accrued interest at a
rate of the Bank's prime rate less 2.0%. In December 1994, 907,143 shares of
Company Common Stock were issued to Mr. Lerner in exchange for retirement of the
principal portion of the debt. A new note was issued to Mr. Lerner in the amount
of $848,000 to cover the accrued interest portion of the loan that remained
outstanding, which note accrued interest at the WSJ prime rate plus 1.0%. The
Company repayed the debt owed to Mr. Lerner in full using a portion of the
proceeds from its initial public offering which closed on September 30, 1997.
PROPOSAL 2. TO APPROVE THE SELECTION OF
INDEPENDENT AUDITORS FOR THE YEAR 1998
The Board of Directors of the Company has appointed the firm of Rowles &
Company LLP, certified public accountants, as independent auditors for the
Company for the year 1998, subject to the approval of the stockholders. Rowles &
Company LLP, which has served as independent auditors for the Company and the
Bank since April 25, 1997, has advised the Company that neither the firm nor any
of its partners or associates has any direct financial interest in or any
connection with the Company or any of its subsidiaries other than as independent
auditors. Representatives of Rowles & Company LLP are expected to be present at
the Annual Meeting and will have the opportunity to make a statement if they
desire to do so and to respond to appropriate questions.
10
<PAGE>
For the year ended December 31, 1996 the Company's financial statements
were audited by C.W. Amos & Company. C.W. Amos & Company was replaced on April
25, 1997 and Rowles & Company, LLP was engaged and continues as the independent
auditors of the Company. The decision to change auditors was approved by the
Board of Directors of the Company and Bank. The financial statements of the
Company and its subsidiaries as of December 31, 1996 and for each of the two
years in the period ended December 31, 1996 were audited by C.W. Amos & Company.
For the two year period ended December 31, 1996 and up to the date of
replacement of C.W. Amos & Company, there were no disagreements with C.W. Amos &
Company on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, not resolved to the
satisfaction of C.W. Amos & Company, would have caused it to make reference to
the subject matter of the disagreement in connection with its report. The
independent auditors' report on the financial statements for the year ended
December 31, 1996 did not contain an adverse opinion or a disclaimer of opinion,
and was not qualified or modified as to uncertainty, audit scope or accounting
principles.
Proxies will be voted FOR the Proposal unless otherwise instructed by the
Stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE
APPOINTMENT OF ROWLES & COMPANY LLP AS ITS INDEPENDENT AUDITORS TO THE COMPANY
FOR THE YEAR ENDING DECEMBER 31, 1998.
ADDITIONAL INFORMATION
STOCKHOLDER PROPOSALS -- 1999 ANNUAL MEETING
Any proposal of a stockholder intended to be presented at the 1999 Annual
Meeting of the Company must be received by the Company at 180 Admiral Cochrane
Drive, Suite 300, Annapolis, Maryland 21401 prior to November 21, 1998, to be
eligible for inclusion in the proxy statement and form of proxy. In order to
curtail controversy as to compliance with this requirement, stockholders are
urged to submit proposals to the Secretary of the Company by Certified
Mail-Return Receipt Requested. Any such proposal will be subject to 17 C.F.R.
(section mark)240.14a-8 of the Rules and Regulations under the Exchange Act.
ANNUAL REPORTS
THE COMPANY'S 1997 ANNUAL REPORT TO STOCKHOLDERS ACCOMPANIES THIS PROXY
STATEMENT. COPIES OF THE REPORTS MAY BE OBTAINED UPON WRITTEN REQUEST TO THE
SECRETARY OF THE COMPANY, 180 ADMIRAL COCHRANE DRIVE, SUITE 300, ANNAPOLIS,
MARYLAND 21401, AND WILL BE AVAILABLE AT THE ANNUAL MEETING.
By Order of the Board of Directors
/s/ Lori J. Mueller
----------------------
LORI J. MUELLER
Secretary
Annapolis, Maryland
March 20, 1998
11
<PAGE>
<TABLE>
<S> <C>
___
[X] PLEASE MARK VOTES REVOCABLE PROXY |
AS IN THIS EXAMPLE ANNAPOLIS NATIONAL BANCORP, INC.
With- For All
For hold Except
ANNUAL MEETING OF SHAREHOLDERS 1. ELECTION AS DIRECTORS, to [ ] [ ] [ ]
APRIL 23, 1998 elect four (4) nominees as
directors listed below (except
The undersigned hereby appoints the as marked to the contrary below)
official Proxy Committee of the Board
of Directors of Annapolis National Stanley J. Klos, Jr., Richard M.
Bancorp, Inc. with full powers of Lerner, John W. Marhefka, Jr. and
substitution, as attorneys and proxies Stanley H. Katsef
for the undersigned, to vote all shares
of common stock of Annapolis National INSTRUCTION: To withhold authority to vote for any
Bancorp, Inc. which the undersigned is individual nominee, mark "Except" and write that
entitled to vote at the Annual Meeting nominee's name in the space provided below.
of Shareholders, to be held at the ___________________________________________________
Annapolis Holiday Inn, 210 Holiday Court,
Annapolis, Maryland 21401 on Thursday,
April 23, 1998, at 6:00 p.m., Eastern For Against Abstain
Daylight Savings Time, and at any and 2. To approve the selection of [ ] [ ] [ ]
all adjournments thereof, as indicated Rowles & Company, LLP as
to the right: independent auditors for the
fiscal year ending December 31,
1998;
The Board of Directors recommends a vote "FOR" the
above proposals.
THIS PROXY, PROPERLY SIGNED AND DATED, WILL BE VOTED
AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE PROPOSAL STATED, IF ANY OTHER
----------- BUSINESS IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE
Please be sure to sign and date | Date | VOTED BY THOSE NAMED IN THIS PROXY IN THEIR BEST JUDGMENT.
this Proxy in the box below. | | AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
- --------------------------------------------------------- OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
|
| THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
|
- --Stockholder sign above--Co-holder (if any) sign above--
+ +
- --------------------------------------------------------------------------------------------------------------------------
(up arrow) Detach above card, sign, date and mail in postage paid envelope provided. (up arrow)
ANNAPOLIS NATIONAL BANCORP, INC.
- --------------------------------------------------------------------------------------------------------------------------
Should the above signed be present and elect to vote at the Annual Meeting of Shareholders or at any adjournment
thereof and after notification to the Secretary of the Corporation at the Meeting of the shareholder's decision to
terminate this proxy, then the power of said attorneys and proxies shall be deemed terminated and of no further force
and effect.
The above signed acknowledges receipt from the Corporation, prior to the execution of this proxy, of the Notice of
the Annual Meeting of Shareholders, a proxy statement for the Annual Meeting of Shareholders, and an Annual Report to
Shareholders.
Please sign exactly as your name appears on this proxy card. When signing as attorney, executor, administrator,
trustee or guardian, please give your full title. If share are held jointly, only one signature is required but each
holder should sign, if possible.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
- --------------------------------------------------------------------------------------------------------------------------
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